Waste Connections, Inc. Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the Waste Connections, Inc. Q2 2025 Earnings Call. Please note, this event is being recorded. I'd now like to turn the floor over to Ron Mittelstaedt, President and CEO. Sir, please go ahead.

Okay. Thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss our second quarter results and updated outlook for 2025, along with providing a framework for the back half of the year. I'm joined this morning by Mary Anne Whitney, our CFO; and several other members of our senior management. As noted in our release, we once again delivered results above the high end of our outlook for the quarter. In spite of incremental headwinds in Q2 from lower-than-expected contributions from higher-margin, commodity-related activities and continued sluggishness in the economy along with tariff-induced uncertainties. As anticipated, we have already completed an outsized year of acquisition activity at approximately $200 million in annualized revenue with a robust pipeline and almost half the year still ahead of us. The strength of our financial profile and free cash flow generation keeps us well positioned for additional acquisitions while maintaining the flexibility for increased return of capital to shareholders including through opportunistic share repurchases, which are already underway. Moreover, in spite of incremental and growing headwinds, our full year 2025 outlook remains within the ranges from February. Providing for approximately 6% revenue growth and 50 basis points of adjusted EBITDA margin expansion to 33%. We remain well positioned for upside from contributions from additional acquisitions, improvements in commodity-related activity and incremental solid waste volumes. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Thank you, Ron, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our July 23 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Okay. Thank you, Mary Anne. We're extremely pleased with our second quarter results, which reflect the enduring strength and consistency of solid waste regardless of the economic environment. Moreover, our operational execution was augmented by continued improvement in employee retention and safety to support pricing ahead of inflation and effectively manage costs. Most notably, we overcame headwinds from incremental weakness in commodities, RINs and cyclical volumes and still delivered margins of 32.7%, consistent with our Q2 guidance. Remember, this also includes 20 basis points year-over-year headwinds from our decision to close the Chiquita Canyon landfill as of January 1st. During the quarter, revenue growth of 7.1% was driven by 6.6% core solid waste pricing, comfortably exceeding our cost of inflation to drive 70 basis points of underlying adjusted EBITDA margin expansion in solid waste. Reported volume declines of 2.6% reflected the purposeful price volume trade-off and the ongoing shedding of underperforming contracts that we have described in previous periods. Beyond that, they reflect the trends we've noted over the past several quarters. That is underlying flat to negative volumes from continued sluggishness and roll-off pulls and lower disposal volumes primarily from construction-oriented activity, both of which showed continued moderation during the quarter. Most importantly, we saw continued improvement in operating trends and the associated benefits. In Q2, voluntary turnover once again stepped down sequentially, marking our 11th consecutive quarter of improvement. On total turnover now below 22%, our voluntary turnover of less than 11% is down almost 60% from mid-'22 and has dropped below involuntary turnover for the first time in recent years. And safety results, which are highly correlated to turnover, once again hit new historic lows. Incident rates were down 15% year-over-year, with momentum for continued improvement. In fact, year-over-year monthly incidents were down over 20% in June on a 5% increase in total employees due largely to acquisitions, which typically come on at higher safety-related incident rates. As anticipated, these improving trends are translating into outside margin expansion. Our underlying margins expanded by 70 basis points, about two times the more normalized margin expansion we would expect from price-led organic solid waste growth. And this is without the benefit of positive volumes. A reminder that when volumes do recover, especially at landfills, they will be nicely accretive. And given our high market share model and broad footprint, we remain well positioned to benefit from any pickup in activity driven by construction or otherwise. In the meantime, we are focusing on controlling what we can, delivering industry-leading margins and positioning ourselves for future growth. We continue to reinvest in the business through CapEx at existing operations and new acquisitions, pursue new organic growth opportunities and advance our sustainability-related projects. We're also focused on leveraging technology to highlight additional avenues for outsized margin expansion using AI-driven applications across multiple platforms from customer retention and pricing to forecasting through data analytics. All of which we will be expanding during '26 and '27 as we look to further digitize. We continue to focus on customer experience and our operations, targeting quality of revenue on the top line and productivity and efficiency gains throughout our cost structure as we position ourselves for growth well beyond our current $10 billion revenue run rate. To that end, acquisition activity is continuing at an above-average pace, resulting in approximately $200 million in annualized revenues already closed to date. Our balance sheet strength, along with a robust acquisition pipeline built on long-term relationships and a consistent, disciplined approach to market selection, position us for additional activity. In fact, including signed LOIs, we expect to close another $100 million to $200 million in acquisitions later this year or by early 2026, with more to follow. Of course, contributions from any additional deals closing in 2025 would be additive to the outlook we've provided. And finally, as noted, we've been in the market buying back shares. As we've consistently maintained, we take an opportunistic approach to share repurchases and look to capitalize when we see compelling dislocations across the market or within our sector. To date, we bought back 1.3 million shares or about 0.5 percentage points of shares outstanding pursuant to our normal course issuer bid, which we renew annually in August, providing for annual repurchases of up to 5% of shares outstanding. And speaking of which, in June, we announced an additional listing and became a founding member of NYSE Texas. A recognition of our corporate presence here in the Woodlands, along with our operations across the state. We've enjoyed tremendous growth as a company since relocating our headquarters from California to Texas, 13 years ago, and appreciate the business supportive environment Texas provides. We recognize the importance of strong community and appreciate the collaborative can-do spirit that Texas is famous for. Shifting next to an update on our remediation efforts at Chiquita Canyon landfill in Southern California. We continue to make progress managing the elevated temperature landfill event. At this time, there is no change to expectations regarding the cash flow or other impacts at the site. The most encouraging progress, however, is on the administrative front, with the U.S. EPA taking a more active leadership role in regulatory oversight of the facility. To that end, our team has been engaged in ongoing discussions with Region 9 of the U.S. EPA in an effort to further streamline ongoing regulatory oversight and approvals at the facility and in line with President Trump's and Administrator Zeldin's stated goals of focusing efforts on powering the great American comeback. Chiquita has requested Region 9's further assistance in minimizing regulatory indecision and inaction by taking a more active role at the site. To be very clear, this is good news and something we requested and will drive continued improvements in the management of the reaction and any impacts to local communities. We expect the results will be a more effective and efficient and ultimately less costly process. And now I'd like to pass the call to Mary Anne to review more in depth the financial highlights for the second quarter to review the elements of our updated full year 2025 outlook and what that implies for the back half of the year. I will then wrap up before heading into Q&A.

Thank you, Ron. In the second quarter, revenue of $2.407 billion exceeded the high end of our outlook and was up $159 million or 7.1% year-over-year. Acquisitions completed since the year-ago period contributed about $113 million net of divestitures. Core pricing of 6.6% was as expected in Q2 and reflected the typical cadence of seasonality. For the full year, core pricing of over 6% is now effectively complete or contractually provided for. Volumes down 2.6% reflect the following year-over-year results in Q2 on a same-store basis. Roll-off revenue was down about 1% and pulls down 3% and rates per pull up 2%. Looking at regional variances, pulls ranged from down high single digits in our Southern region to up mid-single digits in our Western region, with most regions down slightly. Activity levels during the quarter, which would typically reflect a seasonal ramp of as much as 5%, showed only about a 1% sequential improvement between April and June. We would note the constantly changing tariff schedules during this period, which we believe contributed to uncertainty for customers. Landfill revenue was up about 4% on tons up 1.5%. Looking by waste type, MSW tons were up 3%, special waste was up 7%, and C&D tons were down 9%, slightly below recent quarters, indicating limited construction activity. Values for recycled commodities are already down year-over-year coming into the quarter, declining another 10% to 15% during Q2. Renewable energy credits also stepped down by about 15% during Q2. And our U.S. EPA waste activity, which is highly correlated to crude prices and related drilling activity, was down about 10% year-over-year, most notably in June as crude volatility was magnified by ever-changing policies. By way of contrast, we did not see a corresponding decline in Canada, where our business is more production oriented. In fact, our Canada revenue was up year-over-year on both price and volume in line with our expectations, reinforcing our rationale for pursuing this business in 2024 with ongoing growth since then to shift the balance of our waste mix from drilling towards production. Adjusted EBITDA for Q2, as reconciled in our earnings release, was $786.4 million, up 7.5% year-over-year and slightly above the high end of our outlook. At 32.7%, our adjusted EBITDA margin was in line with our outlook and up 10 basis points year-over-year in spite of an extra 20 basis point drag from commodities, which declined during the quarter. In total, total commodity-driven revenues were a drag of about 60 basis points in the quarter, in addition to Chiquita, which was another 20 basis point drag. Underlying solid waste margins were up 70 basis points, similar to last quarter, as Ron described. Similar to Q1, we saw margin improvement across a range of cost categories related to third-party services, labor, and maintenance as we are seeing the benefits of improved employee retention and reduced openings. In contrast, risk management cost reductions continue to lag and remained a headwind in the quarter, providing opportunity for continued outsized underlying margin expansion as we look ahead. Net interest in the quarter was $80.4 million, and our effective tax rate for the second quarter was 25.4%, about 100 basis points above our outlook on higher foreign exchange rates. And finally, year-to-date, we've delivered adjusted free cash flow of $699 million on capital expenditures, up over $110 million year-over-year. As such, we're well on our way to delivering adjusted free cash flow of $1.3 billion as guided. During the quarter, we completed a public offering of $500 million in senior notes to further diversify our funding sources and maintain optionality for capital allocation. Our weighted average cost of debt is about 4% with an average tenor of over 9 years. We ended the quarter with debt outstanding of about $8.35 billion, about 15% of which was floating rate and liquidity of over $1.1 billion. In spite of acquisition outlays of $582 million through Q2, our leverage ratio, as defined in our credit facility, has increased only nominally since year-end to 2.69 times debt to adjusted EBITDA. As Ron noted, we have a lot of optionality regarding capital outlays, including opportunistic share repurchases, which year-to-date have totaled over $240 million. In addition, we look forward to another increase to our dividend, which we will consider when we undertake our annual review in October. I will now review our updated outlook for the full year 2025 and provide some thoughts about what that implies for the back half of the year. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic environment or underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period. Additionally, our outlook does not anticipate a material impact to our effective tax rate or cash flows as a result of the recent tax bill, except as noted. Looking first at our updated outlook for the full year as provided for and reconciled in our earnings release. Given the strength of our performance in the first half of the year and updating for recent commodity values and acquisitions completed to date, we are maintaining our full year 2025 outlook as provided in February as follows: Revenue is estimated at approximately $9.45 billion. While within the range of our February outlook, this reflects a different mix of revenue. Incremental acquisition contributions are offset by reductions in commodity-related revenues based on recent values and U.S. E&P waste and solid waste volumes based on recent trends. Adjusted EBITDA is estimated at approximately $3.12 billion or 33%, again within the range of our February outlook in spite of that mix shift. This reflects 30 basis points higher underlying solid waste margins, overcoming the margin dilutive impact of acquisitions and lower commodity-related revenue and disposal volumes. On a year-over-year basis, adjusted EBITDA margin up 50 basis points reflects over 100 basis points underlying margin expansion. And finally, in the case of adjusted free cash flow at approximately $1.3 billion, within the range of our February outlook, we expect that incremental bonus depreciation associated with the recent tax bill, which we estimate may increase cash flow from operations by about $25 million, would be put to work for a corresponding increase in capital expenditures. We are considering opportunistic fleet and equipment purchases to de-risk potential tariff-related increases as well as CapEx for growth projects, both related to recent acquisitions and at existing operations. The closing of any additional acquisitions would provide upside to our updated 2025 outlook as well as improvement in commodities and related activity and any pickup in volumes. Next, looking ahead to Q3 and Q4. As implied by our full year 2025 outlook, the adjusted EBITDA margin is expected to average 33.6% in the back half of the year, up about 60 basis points year-over-year driven by outsized margin expansion in Q4 from easing comparisons to the prior year for Chiquita and commodities. By quarter, the adjusted EBITDA margin is expected to be roughly comparable across Q3 and Q4 due to a limited seasonal ramp in Q3.

Thank you, Mary Anne. As we have described, we are extremely pleased with our first half results, which highlight the strength and resilience of our business and specifically the outperformance of our core solid waste operations in what is arguably a volatile economic backdrop. In fact, in a more normalized environment, our strong first half performance and operating trends would have prompted us to raise our full year guidance. However, given the uncertainty of today's environment and the impact of lower commodities, we view maintaining our 2025 guidance as prudent and as a win. And while the macro environment remains dynamic, we are well positioned to navigate that uncertainty as our Q2 results demonstrate. As we have consistently maintained, our greatest differentiator is human capital and a purposeful approach to a culture of accountability. We're most grateful for and extremely proud of the dedication of our over 25,000 employees and the local leadership team that is responsible for the consistency of operational execution. We will continue to focus on operational excellence, building on a proven track record and legacy of outsized value creation while also recognizing the value of innovation and the opportunities from leveraging technology and new ideas. Before going into Q&A, I'd like to take a moment to thank and acknowledge my Waste Connections Co-Founder, our Executive Vice President and Chief Operating Officer of nearly 28 years and one of my closest friends ever, Darrell Chambliss. Darrell has announced his retirement from his role as COO, effective August 8, 2025. While we're not making any other announcements at this time, they will be forthcoming over the next few weeks. Darrell can never truly be replaced. He's been the heartbeat of Waste Connections for 28 years. Our Board of Directors, our leadership team at every level, and all of our 25,000 employees owe an enormous debt of gratitude to Darrell. He will be missed every day and will never be forgotten. There’s not enough time on this call for me to adequately express all that Darrell has meant to everyone within the Waste Connections family or across the broader solid waste industry. I wish Darrell, his beautiful wife, Andrea, and their son Nate a wonderful, healthy, fun next chapter that is so richly deserved. We'll all miss you terribly Darrell, and we all love you. Now getting back to all of you. We appreciate all your time today. I will now turn this call over to the operator to open up the lines for your questions.

Our first question today comes from Tyler Brown from Raymond James.

First, congratulations, Darrell. You have had an incredible career. I hope to see you on an Arkansas lake one day. I'm curious if we could delve a bit deeper into capital allocation. Ron, it seems like the M&A pipeline is solid, but you've also restarted buybacks. I want to ensure I'm understanding correctly, as $235 million in buybacks this quarter is potentially the second largest in your history, and we're only 24 days into the quarter. To clarify, is this approach more about being opportunistic rather than a change in available M&A opportunities?

Yes, Tyler. I mean, number one, it absolutely is. As we tried to say in our remarks, we try to be opportunistic when we think that there are abnormal dislocations in either our or our sector's stock and we feel that there has been a recent pullback for a variety of reasons in the sector and in us as well. We have tremendous firepower, both through free cash flow and available capital. As we've demonstrated, we've done a record amount of acquisitions last year. We're on pace to have an enormous year this year, and we've kept leverage flat to down. So it is not a change in capital allocation strategy whatsoever. It's just that we have the capacity to do both. And we believe the combination creates in this environment even better performance alternatives going forward.

Okay. Perfect. And then just a little clarification. So I think you said that there was something like $100 million to $200 million under LOI that could close in the second half, but was that a revenue number or an outlay number?

That was a revenue number.

Okay. Perfect. And then just quick modeling, Mary Anne, just so we have it, but what is the expected M&A impact in '25, just basically based on what's in the guidance?

So coming into the year, the original guidance included $300 million. We have closed about $75 million in deals. The acquisition contribution from the previous year's rollover and deals done was $300 million, which increased by $75 million due to the additional closing of $125 million during the first two quarters.

Okay. Perfect. And then my last one, just can we talk a little bit about E&P. I know it doesn't get a ton of airtime. But actually, if I look at the numbers, it did something like, call it, $180 million in revenue this quarter, which was really good. It was up something like $50 million year-over-year, but that is kind of counter to the cautious rig count. So one, was that secured? Because I thought that we had already lapped that. So I could be wrong there. Was there another acquisition? And then two, just given where the rig count is and your U.S. drilling exposure, should we assume that, that hangs around this $180 million per quarter, just for a little help on the model?

Yes. So a couple of things there, Tyler. Yes, I think that's a fair way to think about the run rate, and it reflects to your point, not only secure, but the subsequent acquisitions we did last year, we mentioned that we've done a couple in Canada, and we've also done some in the U.S. And so you're seeing in the rollover contribution from those deals. And as we said on the call, what stood out in Q2 was the step down in activity in the U.S., but that had been more than offset by the increases in Canada, where at the legacy secure business, for instance, we saw growth both in price and volume during the quarter on a year-over-year basis.

Okay. So $180 million though roughly is a good place marker?

Yes, I think it's between $160 million and $170 million. Depending on seasonality, you need to consider that a little bit.

Our next question comes from Toni Kaplan from Morgan Stanley.

I wanted to drill down a little bit into the volume shedding. So last quarter, you had called out a large contract from Progressive that you didn't renew in October. So I was wondering if it's fair to assume a similar drag in volume in 3Q similar to 2Q, but then maybe 4Q just gets back to sort of more normal shedding. And I know Chiquita is also sort of a factor in here? So like maybe they're still a little bit below normal volume in 4Q and then maybe the normal starts in 1Q of '26. I just wanted to understand the dynamics of how you think about the volume?

Sure, Toni. So as you know, we think in terms of we have the shedding. Of course, we have Chiquita, which we kind of bucket separately, and that does anniversary at the end of the year, but we started diverting tons in Q4, so the impact is smaller in Q4. But when I think about the ongoing impact, you're right, some of the shedding does anniversary. I think the way to think about it is the most negative quarter would therefore be Q3, because you have the combined impact of those ongoing impacts plus what we talked about that lower seasonal ramp impacting the revenue growth Q3 versus Q2. So most negative in Q3 getting back to more like Q2 and Q4. And yes, I agree with your expectation that some of those pieces anniversary as we look ahead to '26.

Yes. And Toni, the one specific contract we did call out last year, the former Progressive contract, actually in North Texas, does anniversary on October 1, as you pointed out.

Great. And I guess maybe just longer term, when you think about volumes, Ron, like I guess you made the comment that when volumes do recover, like that will be accretive. Do you expect like that volumes recover in '26? Or like when does that happen? Or because of all the M&A, like maybe it's even pushed out further than that, just wanted to sort of get a longer-term picture.

Yes, I think it's important to analyze the various components contributing to the negative volume. To summarize, we’re looking at around a negative 2.5 for the quarter, which is slightly more than that. There’s about a 100 basis point trade-off related to pricing, which we are managing based on the economic climate and inflation rates. This situation could improve. Additionally, there's another 100 basis points from deliberate reductions, including the decision not to renew a significant contract in North Texas, particularly with Chiquita. We've been active in mergers and acquisitions throughout 2024 and will continue into 2025, so those dynamics will persist. Currently, there’s about a 50 to 60 basis point impact from weaker economic activity, especially in construction-related sectors, which has led to a 9% decrease in construction and demolition services in the quarter. We hope that, with the recent legislation passed in Congress, a potential decrease in interest rates in the latter half of this year into next year might stimulate construction activities at all levels. That would ideally bring us some real-time benefits, though we aren't making predictions on that front. We've been experiencing a flat to negative environment in government spending and GDP for nearly three years now. While I would hope that 2026 may change this trend, we can't be certain.

Our next question.

All right. We just didn't hear our name called. So appreciate everyone taking the question. Mary Anne, just maybe trying to bridge from the $9.45 million you saw in 4Q on the revenue side to how you see it now because you pointed out the mix has changed, you got the $75 million higher M&A revenues. Maybe give us the other kind of moving pieces here because I think that will help us and investors kind of understand some of the mix shift a little bit better? I mean, how much more is the impact from commodities and potentially kind of underlying volumes versus what you thought?

Sure. The incremental contribution from acquisitions is $75 million, which has been positively affected by foreign exchange improvements worth around $20 million. However, this is offset by reductions driven by commodities, with recycled commodities down about $25 million and RINs down an additional $5 million. We also noted a half point decrease in overall solid waste volumes. These factors effectively balance each other out, but it's crucial to understand the differing margin contributions from each element. To counteract the slight margin dilution from the incremental M&A, which is under 10 basis points, the underlying business needs to improve by 30 basis points to address the headwinds posed by the lower recycled commodities and RINs.

And Noah, I would add that you also have about another approximately $20 million to $25 million in E&P volumes lower in the second half based on current rig count in the U.S. versus Canada. Meaning that's not happening in Canada. It is happening in the Permian and the Louisiana on and offshore.

Yes. Thanks, Ron, yes.

To $20 million, $25 million lower versus what you thought in February?

$50 million annualized, $25 million in the second half.

Yes. For modeling purposes, could you provide the recycled commodity price assumption you started the year with and what you are currently assuming for the second half given the recent decline?

Yes. Let's address the second part of that first, Bryan. When we began in February, we anticipated a range of about $105 to $110 on OCC, which is the largest component of our basket. Currently, we're observing that to be closer to $85 to $90, more towards $90 as I assess the situation in real time for the second half.

Regarding your question about differences across Canada and other regions, I would say that when I look at these more cyclically exposed areas, markets in Canada are performing relatively better, along with our West Coast markets. The most significant weakness is found in our Southern region, which includes Florida, Texas, and Louisiana, as well as our Eastern region, which covers the Northeast and some Southeastern markets.

Our next question comes from Jerry Revich from Goldman Sachs.

This is Adam on for Jerry today. I think the 2025 margin guidance implies over 100 basis points underlying margin expansion compared to 70 basis points in the first half of the year. What are some of the moving pieces driving that accelerating underlying margin expansion in the balance of the year? Is that the improvements in voluntary turnover? Any color there?

Yes, thanks for pointing that out. Yes, we are bullish based on the trends we've seen. And as I described, all of those indicators trending positive for us as we move through Q2, that we see acceleration there and see the increased margin expansion. Then, of course, more broadly, you'll see a bigger increase in Q4 because the comps in other areas get easier. And so the headwinds abate. But looking sequentially, we'd expect margin to continue to improve as we move through the year, primarily because of those improving trends.

Great. And then you closed on the $75 million of annualized revenues, incremental in the quarter and then expect potential to close on the $100 million to $200 million later this or early next year. Can you just comment on the mix and margin profile of these acquisitions and how we should think about the incremental in-year EBITDA associated with the $75 million in incremental revenues acquired in 2Q?

Sure. Let's address the first part of your question. I am very confident that the $100 million to $200 million we anticipate closing in Q3 and Q4 will come entirely from traditional solid waste operations, with no involvement from E&P or other areas. This amount is made up of transactions across various regions, providing a good level of diversification. It includes franchises on the West Coast and competitive markets in the South, Midwest, and East. Generally, the margins from these transactions tend to be slightly lower than our corporate average. We suggest considering an EBITDA margin of around 25% as a guideline, though some may be higher, while those in regions with high tipping fees might show lower margins. That covers the first part of your inquiry. The second part pertains to the additional $75 million that we have finalized since our Q1 report. Our margins remain consistent with previous commentary. This figure includes a smaller yet beneficial E&P acquisition in Canada, which was the least impactful to the total $75 million but did contribute positively to margins. For this new $75 million, a margin estimate of 25% to 30% would be reasonable, given the E&P acquisition.

If you assume some dilution on the order of 10 to 15 basis points from incremental M&A, given our size and the relative contribution, that's probably the right way to think about it.

Our next question comes from Chris Murray from ATB Markets.

We've had extensive discussions regarding volumes, and I've noticed a divide between the construction and manufacturing sectors in terms of services. Do you have any insights on what you’re observing in some of the end markets? Are you noticing any volume decreases in services, such as restaurants and other areas impacted by consumer behavior, compared to the trends you've highlighted for construction and manufacturing?

Yes, Chris, it's actually the opposite of what you’re asking. We're experiencing positive growth in commercial yardage across our system, including growth in commercial customers and strong revenue growth on the commercial side. We're not observing any issues there. The slowdown is occurring in the larger manufacturing industry and in cyclical construction activities, both commercial and residential. We noted that special waste, which can be cyclical, saw an increase in the quarter, but that might be misleading as it could be influenced by one or two significant projects. Some states are trying to pass budgets and have put holds on existing projects. This slowdown appears to be temporary and is more about larger projects being stalled or delayed rather than affecting the overall commercial business on Main Street America.

So I guess the reason I ask the question is that when I think about volume recovery, it seems like we are in a period of navigating uncertainty, but the underlying majority of the economy still feels stable. Is that the correct perspective, or how are you all viewing this situation in a way that might lead to a faster volume recovery than we expect?

Yes, we have mentioned for quite some time that our performance has been relatively flat, oscillating around 1% up or down for 10 to 11 consecutive quarters, with the economy remaining neutral. This trend continues, and while there may be slight variations, such as a potential decrease of 1.5% instead of 1%, factors like significant weather impacts in the South have played a role. The South has shown unexpected weakness in a region that has typically performed well. Therefore, we are cautious about making any predictions. We've never provided guidance based on the assumption of a major economic recovery, and we are sharing our real-time observations, which we hope will continue to improve. After 11 quarters of stability, we remain cautious.

Right. Sounds good. Maybe one more question, if you don't mind. As I listen to the call, and I listened to some of the things you talked about in terms of turnover, in terms of technology, we really haven't talked about RNG development and things like that. But you go back a few calls, and we've been talking about outsized margin expansion as we went into '26, '27. Given where you're sitting, and I appreciate volumes may be going to hurt, but I think as you pointed out, second half margin expansion is already kind of aiming at 100 basis points, which probably carries you into the early part of '26. How should we be thinking about that margin cadence as we go into sort of the later years as you get some of the benefit of some of the investments you made over the last little while of some of the new initiatives that you're implementing?

We believe in positioning ourselves to achieve additional growth beyond the usual 20 to 40 basis points of price-led organic growth. This year, we are seeing a delivery of 50 basis points despite facing extra challenges from commodities. We discussed the potential for normalization, which could provide another 50 basis points solely from commodities. Therefore, the rationale behind our current investments is clear, and we are optimistic about continuing to see those benefits in future periods. We are confident that we will exceed the 20 to 40 basis points target.

Our next question comes from Konark Gupta from Scotiabank.

Maybe on the price cost front, it seems like you guys are still heading as an industry, maybe near the high end of the typical ranges or maybe above the 6.5% pricing and whatnot. Heading into '26 like exiting '25, do you feel like the price/cost spread can potentially come down or normalize to what sort of the normal levels? Or is that still kind of like a farfetched idea? And if at all, the spread narrows or stays the same? Would it be more driven by the price or the cost?

It would be influenced by both factors. Looking back 15 years, through various economic cycles, we've typically maintained a spread of about 150 basis points above the CPI, which serves as a reasonable cost proxy. There have been years when costs were slightly higher than CPI or slightly lower, but that's a fair benchmark. As the CPI declines, which it has been doing and is expected to continue, possibly stabilizing between 2.5% and 3% from the 9% level seen 24 to 30 months ago, the overall reported prices should also decrease accordingly. However, we aim to maintain that spread, as we have for a long time. While a higher CPI may slightly widen that spread, the effect is minimal. Over the past 1.5 years, we have seen our overall costs decline each quarter. Recently, our labor costs decreased to around 4.2% to 4.3%, with total costs falling to about 3.4% to 3.5%. Although still slightly above the CPI, they are decreasing. Using that as a guideline, a spread of 150 to 200 basis points above would suggest a pricing range of about 5% to 5.5% to achieve similar performance to the 6.5% targeted for 2025.

That's great information. I just want to follow up, Chiquita. You mentioned having the EPA as an adviser in the room should be beneficial. Do you think there's a chance to reduce your cost obligations over the next several years with the EPA's involvement, or is that more or less a certainty?

We don't have any changes to the cost, cash outflow, or closure assumptions we've provided. We utilize a multi-year model, which shows variability in quarterly results. However, none of the assumptions have significantly changed. Many of these costs are related to legal and consulting fees, heavily influenced by California's regulatory framework. If the EPA streamlines some of these processes, that could improve the situation regardless of remediation costs. We remain cautiously optimistic about our performance, but we will adhere to all our regulatory and legal obligations to the overseeing agencies, as we have been doing and will continue to do. While it's challenging to predict outcomes, we feel incrementally better about our position.

Our next question comes from Michael Doumet from National Bank.

So obviously, nice job on the employee retention improvement. I wonder, Ron, if you'd characterize that improvement is largely complete, obviously, understanding the impact to margins lagged. And if that's the case, what are your thoughts on some of the other call it, buckets of potential efficiencies that you can drive incremental price/cost spread going forward, I think, such as the AI initiative you mentioned at the top of the call?

Thank you for your comments. Regarding turnover and employee retention, our goal is to reduce total turnover to below 20% by the end of this year and maintain it below that level into 2026. We also aim to keep voluntary turnover under 10% as we move forward. We're not finished improving, but we're getting close. The biggest opportunities for us going forward lie in the use of technology, especially AI. Rather than just increasing the price-cost spread, our focus is on maintaining that spread and reducing churn, which will positively affect our reported volumes. We believe this has significant potential based on the pilots we've conducted recently. We expect to fully implement these technologies by the fourth quarter of this year. Additionally, we are working on projects such as real-time routing for our operations, which will allow us to optimize routes for our services and improve productivity. We are also digitizing our maintenance programs, which will enhance our inventory management, enable better project planning, and allow for more preventative maintenance. While these initiatives might not individually drive the same margin improvements as reducing turnover, combined, they will have a meaningful impact as we roll them out in 2026 and 2027. Yes. I think just to follow up on that. Does that in your opinion, could that change the calculus for the typical price cost spread that you guys historically had? Again, I would want to say if we could maintain the typical price spread we have had, and we could reduce by 20% to 40% the churn impact of that, meaning you have to sell 20% to 50% less customers to stay neutral, I'll take that all day long.

Our next question comes from Stephanie Moore from Jefferies.

I have just one question. It seems that the current administration may be more lenient regarding large mergers and acquisitions compared to the previous one. I would like to ask if this environment might make you more open to pursuing larger deals or opportunities that fall outside your usual annual transactions.

Thank you, Stephanie, for the question. Over the past 28 years, we have never faced a second request from the Department of Justice or its antitrust division, which speaks to our market model. We have not avoided any opportunities due to concerns about getting clearance from the Justice Department or issues of concentration. I believe a more lenient justice process could actually accelerate M&A for us rather than inhibit it. In general, this could expand our options in some markets. It's important to note that the filing requirement is based on a purchase price of around $125 million, not revenue, which means it could involve deals with around $40 million in revenue depending on profitability. While this requirement is something to consider, it has not hindered us, and we welcome a more favorable regulatory environment.

Our next question comes from James Schumm from TD Cowen.

Regarding free cash flow, you mentioned that you're on track to meet your spending guidance for Chiquita Canyon. Can you provide an update on your best estimate for next year's spending on Chiquita? Was that $50 million from your last update? Also, can the EPA provide any relief on leachate disposal, or does that need to be handled by the state? Additionally, could you break down the $100 million to $150 million you've spent this year? It would be helpful to understand how much is allocated to leachate and to have a sense of the different costs involved.

Sure. What I would tell you is, I think it's too early to make any changes up or down to our '26, '27 estimates because it is a dynamic situation, and we are looking at this potential sort of lead coordination change, okay? And so it'd be speculative, I think, to do that. To the part of your question regarding how much is leachate, that's about 70% of the cost. The cost of treatment and disposal and transportation. So obviously, any impacts that we can make operationally or outlet-wise or transit-wise help that. We have made some changes that have recently reduced that in real time we will begin seeing throughout the third quarter as somewhat of a step change for us.

And they were contemplated by.

And yes, and they were contemplated. And that is not a result of anything new. That's a result of ongoing efforts. So that is what we can tell you about that, James.

And then, Ron, as you consider different options to address those costs, will you be appealing to the EPA? Or would that still need to go through the state in terms of getting some assistance?

I think the answer depends on what that cost is, James. The EPA is not going to direct the state to take actions that go against state laws, regulations, or objectives. That's not their purpose. We still have to comply with all those requirements, and we are currently doing so. However, there are aspects under the EPA's jurisdiction where it is unclear if it's a federal, state, or local issue regarding certain decisions. In those areas, I believe the EPA can provide us with useful clarity. So stay tuned for how this develops.

Okay. Very good. And then just lastly, for recycling, what does your overall book of business look like right now? Is it majority fee-for-service? Or are you assuming the full commodity price risk? What does the book look like currently?

Yes. Most of the recycling we do as part of a broader service provision. And so we have the exposure, which is why we communicate what the sensitivity is on the total recycling basket. And you see that move through our numbers every quarter.

Our next question comes from Tobey Sommer from Truist.

It's Henry on for Tobey here. I have a quick question about M&A. You mentioned this briefly before, but what is the typical timeline we should expect for tuck-ins to achieve company average margins? Also, has that average timeline changed as you've increased these acquisitions?

Yes, I would say that everyone's definition of a tuck-in varies a bit. Generally, a tuck-in is expected to improve the company's margin within a 12- to 18-month period. This is a relatively quick timeframe since it often involves shutting down an existing facility and consolidating routes. On the other hand, if you're dealing with a standalone acquisition, which might generate about $20 million to $30 million in revenue, it typically requires a longer timeframe, possibly about 3 to 4 years, to align with the company’s average margins. Keep in mind that if we acquire a company with a 23% to 24% EBITDA margin, that’s significantly below our average margin. Even if we manage to improve it by 200 basis points each year, it could take 4.5 to 5 years to bridge that gap. So, it really depends on how you define a tuck-in.

And our next question comes from Tami Zakaria from JPMorgan.

I just have one quick clarification question about the opportunistic buyback. So if the $100 million to $200 million M&A in the pipeline closes this year, could we still expect some opportunistic repo? Or will it be sort of an either/or outcome?

We view ourselves as having the optionality to continue to do all aspects of capital allocation. So no, we don't see it as either/or.

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

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.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. Thank you for joining. You may now disconnect your lines.