Earnings Call Transcript - WCN Q1 2024

Ronald Mittelstaedt, President and CEO

Okay. Thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss our first quarter results and to provide a detailed outlook for the second quarter. I'm joined this morning by Mary Anne Whitney, our CFO, and several other members of our senior management. We are extremely pleased by the strong start to the year, driving better-than-expected operating and financial results, which, along with recently completed acquisitions, positions us well for the remainder of 2024. Adjusted EBITDA margin expansion of 160 basis points to 31.4% in the seasonally weakest quarter of the year puts us on track to exceed our industry-leading full year margin outlook of 32.7%, as continuing improvements in employee retention and safety trends, along with rising commodity values, provide momentum for continued performance. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer as well as other housekeeping items.

Mary Whitney, CFO

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 April 24 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both the dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Ronald Mittelstaedt, President and CEO

Okay. Thank you, Mary Anne. As noted earlier, we're off to a great start in 2024 by any number of measures, beginning with our financial results. Already set up for industry-leading outsized margin expansion during the year, we delivered a top to bottom beat in the quarter with adjusted EBITDA margin 20 basis points above our outlook and momentum for continued outperformance from a number of drivers, and this was all achieved in spite of significant weather impacts in January and early March. Along with better-than-expected financial results, we saw continued improvement in trends for employee retention and most importantly, safety. In Q1, voluntary turnover once again stepped down sequentially, making the sixth consecutive quarter of improvement to levels, which are now 30% below the peaks we saw in late '22. Similarly, we saw continued improvement in safety, with incidence rates declining for the seventh consecutive month. In fact, during Q1, we achieved some of our best safety performance in years, with monthly incidents down to 3-year lows, in spite of outsized growth from acquisitions during that period. We believe these results reflect our commitment to a culture of accountability with empowered and engaged employees. To that end, we're excited about the steps we've taken to support employee growth and development with expanded training, including through our in-house driver academies, the second of which will open this summer, and our diesel technician school partnership offering. We expect that these internal efforts will augment the improving dynamics we've seen in employee recruiting, resulting from additional resources and targeted efforts. As noted previously, the progress in retention and safety we're seeing today positions us to unlock future benefits from improving costs and risk management, along with continued and expected growing savings across several areas, including labor, maintenance and third-party services, all of which we are seeing in the financials today. Moving back to our financial results, starting with organic solid waste growth. In the first quarter, we delivered solid waste core pricing of 7.8%. And to be clear, our core price is what we actually retained, not what was implemented, which in other models gets reduced by churn to calculate yield. Our price retention was in line with our expectations and continues to reflect the resilience of our market model. Similarly, reported volume growth of negative 3.8% was in line with our expectations following extreme weather events, primarily during January, which we believe impacted reported volumes by about 100 basis points beyond what we would consider typical levels of ongoing purposeful shedding. Looking ahead to Q2, we would expect a sequential step-up in reported volumes of about 100 basis points, assuming a typical seasonal ramp on activity. And as a reminder on volume calculations, our reported volumes are strictly solid waste volume changes, not RNG, E&P, recycled commodities or acquisitions until after we've owned them for 12 months. Companies calculate volumes differently, and they may view them differently. As discussed in previous quarters, our outsized growth over the past few years has created the opportunity for improving revenue quality and otherwise rightsizing newly acquired locations. Depending on the market, purposeful shedding and contract nonrenewals may provide multiyear tailwinds for margin expansion, along with improvements in asset utilization and operating efficiencies. We look forward to similar opportunities from acquisitions that fit our strategy and meet our financial criteria as we maintain our focus on long-term value creation. We continue to see high levels of seller interest and have a robust pipeline of solid waste opportunities across our regional footprint. As noted, acquisition activity has already contributed to our strong start to the year with approximately $375 million in annualized revenue completed to date. In addition to the secure energy divestitures we acquired in February, we've completed acquisitions of over $150 million in annualized solid waste revenue, including a new market entry providing services to customers in Indiana and Southern Michigan. The strength of our financial position and free cash flow generation provide flexibility for continued acquisition outlays in 2024 for what could be one of our busiest years ever, along with continuing to increase our capital to shareholders.

Mary Whitney, CFO

Thank you, Ron. In the first quarter, revenue of $2.073 billion was about $23 million above our outlook due primarily to incremental acquisition contributions and higher recovered commodity values. Revenue on a reported basis was up $172 million or 9.1% year-over-year. Acquisitions completed since the year ago period contributed about $81 million of revenue in the quarter or about $78 million, net of divestitures. Solid waste organic growth was led by 7.8% core price, which ranged from over 5% in our mostly exclusive market Western region to up to 9% in our competitive markets. Total price of 7.1% reflected a reduction of about 70 basis points in fuel and material surcharges, primarily related to lower fuel rates. We have high visibility for full year 2024 total price in the range of 6% to 7%, with 75% of our core price either already in place or specified by contract, as is pretty typical for us by this point in the year. Solid waste volume losses of 3.8% in Q1 include about 1% from January storm-related closures and other weather impacts that resulted in volume losses to varying degrees across all of our geographic regions beyond the ongoing purposeful shedding and price volume trade-off. Looking at year-over-year results in the first quarter on a same-store basis. Daily roll-off pulls were down 3% driven by outside declines in our most weather-impacted markets in our Mid-South and Eastern regions. And daily landfill tons were down 6% on lower special waste activity and C&D tons, both of which were down about 15%, while MSW tons were flat, despite the weather impact noted. Looking at special waste and C&D. The year-over-year slowdown in Q1 was widespread, but most notable in our Central region and Canada, both of which benefited from outsized activity in prior year periods. We saw improving trends in both roll-off pulls and MSW tons during the quarter, beginning with January activity down high single digits due to severe weather and ending with March about flat or up nominally on a year-over-year basis. And in our Western region, the best barometer of underlying activity given the nature of franchises, reported volumes were positive in Q1, despite the weather impacts in January. Beyond solid waste, revenues played out slightly better than expected in Q1, with recycled commodities, landfill gas and renewable energy credits, or RINs, collectively up about 50% year-over-year on recycled commodity values up around 15% from earlier this year. Prices for OCC, or old corrugated containers, averaged about $130 per ton in Q1. And RINs averaged about $3.10. Adjusted EBITDA for Q1, as reconciled in our earnings release, was $650.7 million, up 14.8% year-over-year and about $10 million above our outlook. At 31.4% of revenue, our adjusted EBITDA margin was up 160 basis points year-over-year and 20 basis points above our outlook. These results include an estimated 40 basis point margin drag related primarily to the extreme weather-related impacts noted. Therefore, on a normalized basis, margins were up 200 basis points year-over-year. Net interest expense in the quarter increased by $10.8 million over the prior year period to $76.4 million due to higher outstanding debt and increased interest rates as compared to the prior year period. During Q1, we completed a public offering of $750 million of senior notes, with proceeds directed to floating rate debt repayment, reducing borrowing cost by over 100 basis points. Our current weighted average cost of debt is approximately 4.15% with an average tenor of over 10 years. We ended the quarter with debt outstanding of about $7.9 billion, about 19% of which was floating rate, liquidity of approximately $830 million and our leverage ratio as defined in our credit agreement was about 2.8x debt to EBITDA. Our effective tax rate for the first quarter was just under 21%. The Q1 rate, as expected, included a benefit to the provision related to excess tax benefits associated with equity-based compensation. In addition, it reflected the impact of an investment tax credit associated with an RNG facility expected to begin service during the year, which has about a 70 basis point benefit to our effective tax rate for 2024. And finally, adjusted free cash flow of approximately $325 million was in line with our expectations and our full year outlook of $1.2 billion as provided in February. I will now review our outlook for the second quarter of 2024. Before I do, we'd like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the securities commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period. Revenue in Q2 is estimated to be in the range of $2.2 billion to $2.225 billion. This includes solid waste price plus volume growth of approximately 4% from total price of 6.5% to 7%, on core price of 7% to 7.5% and volume down 2.5% to 3%. Adjusted EBITDA margin in Q2 is estimated at approximately 32.5%, up 140 basis points year-over-year. Depreciation and amortization expense for the second quarter is estimated at approximately 12.8% of revenue, including amortization of intangibles of about $44 million or $0.13 per diluted share net of taxes. Interest expense and net interest income is estimated at approximately $82 million for the second quarter. And finally, our effective tax rate in Q2 is estimated at about 23.5%, subject to some variability.

Ronald Mittelstaedt, President and CEO

Thank you, Mary Anne. When I returned to the seat 1 year ago this week, I emphasized the importance of the decentralized operating model and culture of accountability that has served to drive differentiated results since our beginnings as a company. Reflecting on the progress that has been achieved over the past 12 months, I could not be prouder of our local teams. Although we've added to the playbook and made some organizational changes, we've mostly reinforced our vision and values and, as we say, doubling down on human capital. And you've seen the results in our most important operating value. As reported in March, the lowest number of safety incidents that we've seen in 3 years, in spite of adding over 3,000 employees during that same period. So I want to conclude by thanking our 23,000 employees who put safety first every day and whose commitment to accountability is evident in not only what they say, but what they do, as demonstrated by delivering such a strong start to 2024. With solid waste pricing largely in place, improving operating trends, higher commodity values and the benefit of what could be a record year of M&A, we are well positioned. That all said, we believe it's appropriate as in the prior years to wait until our Q2 earnings release to consider updating our outlook for the full year. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions.

Operator, Operator

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

Patrick Brown, Analyst

Obviously, margins are up 160 basis points. I mean, a great start to the year, particularly given the drag from weather. But I was just hoping we could get a little bit more detail maybe on some of the puts and takes in the quarter, because I do assume the maybe fuel, recycling, M&A were all slight tailwinds, but just any additional color would be helpful.

Mary Whitney, CFO

Sure, Tyler. We view this situation in terms of 200 basis points, excluding significant weather-related impacts that have led to lower volumes. I would classify those 200 basis points into two main categories. The first category, which includes commodity-driven factors like recycling and RINs, accounts for about 100 basis points. The remaining 100 basis points come from other areas of the business, primarily solid waste, where exploration and production has contributed positively, and acquisitions have added value as well. This overall performance reflects the benefits of the price-to-cost spread and improving operational trends. For example, in wages, we previously noted increases for our employees last year were around 8% and have decreased to approximately 6%, dropping below 6% to around 5.5% to 6% in the first quarter. This demonstrates how we are leveraging the price-cost dynamics. Additionally, we are seeing improvements in third-party costs as we reduce turnover and enhance safety.

Patrick Brown, Analyst

Yes. Excellent. Okay. Yes, very core level, good improvement. Ron, I'm sure there's going to be some additional questions about this, but maybe I'll just kind of kick it off, the discussion about it. But obviously, the U.S. government EPA made some changes on the regulatory side on PFAS in the last couple of weeks. And I was just hoping you could give us some high-level thoughts about that broadly, what it means for Waste Connections. But specifically, I was wondering too to get your thoughts on what this may mean for landfill leachate cost just in the near to intermediate term and what are the prospects to recoup any additional costs, whether it be operating or capital costs.

Ronald Mittelstaedt, President and CEO

Sure. First, Tyler, I want to emphasize that the changes in legislation unfolded as we anticipated. This wasn’t unexpected for us or the broader industry. Looking at it from a broader perspective, new federal regulations like this typically benefit well-capitalized public companies both in the short and long term. They create a level playing field where companies with the necessary capital and infrastructure can maximize opportunities. Generally, the revenue potential far outweighs the costs associated with compliance, both operationally and financially. Such regulations often act as catalysts for mergers and acquisitions, so I don't believe public companies have any concerns about these changes in federal regulation. Additionally, there's significant legislative activity ongoing, particularly at the staff level, where the real work of amending and refining regulations begins after they are passed. We're hearing that there will be amendments to better align the regulations with its original intent, which was not to penalize passive receivers, like landfills. Landfills serve as passive receivers, managing materials as required by law and permits on behalf of producers and consumers. This legislation primarily targets producers rather than passive receivers. Therefore, we can expect the law's language to be adjusted accordingly. The EPA has also clarified that the regulations are not intended to create liability for passive receivers, which is what our landfills are. To summarize, while the implementation details remain forthcoming, there are cost-effective capital opportunities for treatments, such as foam fractionation, that we've actively pursued at some of our landfills over the past year and a half. We have a good understanding of what methods will be effective. Overall, I don’t believe this will significantly affect capital costs for the industry, although it may introduce some additional pricing costs which we can work to recover. Regarding leachate costs, if we utilize low-cost capital and conduct some on-site treatments, it should not impact leachate costs significantly. Some POTWs may hesitate to accept it, even if treated, due to concerns, but generally, options will be available in most markets. If costs do rise, that may create localized pricing opportunities where fewer options exist. That's our comprehensive view on this issue.

Patrick Brown, Analyst

Yes, that's perfect. I really appreciate the detailed information. Just one quick question. Based on what we know today, what is the M&A benefit to 2024 revenue?

Mary Whitney, CFO

So when I think about the incremental deal activity that was done, that would add $80 million to $90 million for the full year on top of what we already had, which I think was $325 million.

Operator, Operator

And our next question comes from Sabahat Khan from RBC Capital Markets.

Sabahat Khan, Analyst

Just on the Q2 guidance that you provided around volume being down 2.5% to 3%, I was just hoping if you can maybe detail that out a little bit in terms of shedding versus some of the other factors, please.

Ronald Mittelstaedt, President and CEO

Yes. I believe this indicates more opportunities for margin improvement and reflects a higher level of mergers and acquisitions that have already occurred at the beginning of this year and in the latter half of last year. I would estimate that about 50 basis points of the increase comes from this, which aligns with our guidance. We expect to see approximately a 50 to 75 basis point continuous improvement throughout this year, with a 100 basis point lift from weather-related factors as we move from the first to the second quarter. This trend will continue with another 50 to 75 basis points increase in each subsequent quarter. While there may be some variations due to factors like incremental shedding, this outlines the main difference we anticipate.

Sabahat Khan, Analyst

Okay. Great. And then maybe just continuing the margin discussion from the last question. I think we're looking at another, I think, 100-plus bps of margin improvement in Q2. It seems like the Q1 margin improvement was split between kind of core business and recycling RINs, et cetera. Maybe just walk us through kind of the confidence around that 120 bps in Q2. What is that coming from, maybe the split there? And how much of a tailwind from sort of commodities and RINs are you baking into that improvement into the next quarter?

Mary Whitney, CFO

Sure. So the way to think about it is that the greatest margin contribution from recycled commodities and RINs would be in the first quarter would decrease over the course of the year, all of the things being equal, just because the comparisons get tougher, right? Because you had commodities ramp last year. And so if, by way of example, you started with 100 in Q1, you could see that stepping down to 60 or 50 basis points in Q2. So that really tells you that the tailwinds are coming from the underlying business, and that is growing. And as we said, coming into the year, we had talked about that outsized opportunity between that price cost spread that I described we're already seeing in Q1, and we expect that to continue, and also the operating leverage we're getting from those improving dynamics around retention and turnover where we've said that we'd see it in a number of different areas. And as we've indicated, we're starting to see that, whether it's the relationship between overtime and straight time, even if we have more heads in place, that's seeing overall improvement and the reduction or the slower growth in third-party costs providing some more margin expansion on things like outside repairs. So those are the types of dynamics that would contribute to a growing operating leverage as we move through the year, and that's what gives us the conviction for Q2 is that we're already seeing it in the numbers, in our operating statistics. And we know that the dynamic is that the savings follow after you see those quarter after quarter of improvement.

Ronald Mittelstaedt, President and CEO

I want to mention that, although you didn't ask, I think it’s important to clarify a few details. We completed the secure E&P transaction in the first quarter, which we expect will be margin-enhancing for the entire year. It's worth noting that, unlike our solid waste business, the second quarter is actually the weakest seasonal quarter for revenue, EBITDA, and margin in that segment due to the thaw breakup period in Canada from April to mid-June. In the solid waste business, the first quarter is typically the weakest. Therefore, it’s important to understand that the margins in the second quarter are not primarily affected by that segment; they are driven by our underlying solid waste operations.

Sabahat Khan, Analyst

Got it. That's super helpful. And maybe just a quick follow-up, Ron, around your answer in the earlier question about the new PFAS regulation potentially adding to the M&A opportunity set. Presumably, this is going to take a while to play out. But maybe from a philosophical perspective, how big of an addition could that be to the M&A set in terms of how many more folks could come to market? And over what period of time do you think that plays out in terms of the benefit to the larger acquirers?

Ronald Mittelstaedt, President and CEO

Yes. Well, number one, I would tell you, it is too early to understand all that. I think it depends on ultimately what the regulation is and how private folks decide to comply with it. Obviously, it has the most effect on disposal-related assets directly. And of course, there are far fewer of those today than there were in previous cycles of incremental federal regulation changes. But without question, it has traditionally been a macro driver. It does take time for that to happen. So it's not something that's going to be a '24 or maybe even an early '25 thing. But over time, it does tend to drive M&A.

Operator, Operator

Our next question comes from Michael Hoffman from Stifel.

Michael Hoffman, Analyst

Ron, how do you perceive the open positions in comparison to last year? Additionally, once you are fully equipped with in-house training, what do you think the impact will be on your fill rate from the elements that you manage and control in the training?

Ronald Mittelstaedt, President and CEO

Okay. So Michael, historically we've operated with an open head count of about 3.5% to 4% to account for natural attrition and proactive efforts to manage involuntary turnover. At our peak during '22 and '23, we saw our open headcount rise to nearly 7.5%. However, we have successfully reduced that throughout '23, bringing it down to around 4%, perhaps even 3.9% on a run rate basis, which aligns with our historical levels. Some regions are operating at a 2.5% level, and we are comfortable with that. Year-over-year, we've decreased open headcounts by 46%. Voluntary turnover peaked but has now decreased to about 15.7% as of April 1, with a goal of reaching between 10% and 12% by year-end and into '25. We are more than halfway to our target from a year ago. Regarding your second question, we aim to have at least one-third of new hires come from our in-house development programs and academies by mid-'25, which is our target, though it could be higher.

Michael Hoffman, Analyst

Okay. That's terrific. And then everybody is going to wring their hands about PFAS for a while until this all plays itself out. But putting it in perspective, leachate costs are 1% to 2% of revenues It's not 5% to 10%?

Ronald Mittelstaedt, President and CEO

No. It's actually even lower, Michael. 1% is a fair average. It actually is just below.

Michael Hoffman, Analyst

Okay. And the treatment technologies that you mentioned, I mean, we're 15 billion to 20 billion gallons a year of leachate as an industry. It's $0.05 to $0.20 a gallon is the range. But the treatment technologies are inside that range. So it's not like you're quadrupling or whatever, if you had to add those technologies to pretreat and take the PFAS out before managing.

Ronald Mittelstaedt, President and CEO

No. I mean, Michael, as you know, there's great variability in the size of landfills and the amount of leachate based on how old they are and how much waste mass is in place. And of course, what the weather conditions are in that geography. But you're talking about $1 million to $4 million for the capital cost to do treatment of most landfills in the U.S., and that will then lower the leachate cost to what it is today.

Michael Hoffman, Analyst

Got it. Okay. My understanding is that the Senate had a meeting about a month ago where the Environmental Public Works Committee sought to discuss what the intervention language should look like, with the goal of trying to get something passed in 2024. Are you hearing anything different than that?

Ronald Mittelstaedt, President and CEO

I have heard the same thing through industry association council and lobbyists, but I do not have any better information than that, Michael.

Operator, Operator

Our next question comes from Kevin Chiang from CIBC.

Kevin Chiang, Analyst

Congratulations on a strong quarter and a solid start to the year. I'd like to begin with the margin outperformance. Looking at your full year guidance, which I know hasn't been updated yet, you're at 120 basis points. Reflecting on our initial expectations for the year, we anticipated a slight outperformance in the first half and perhaps slightly below 120 in the second half, but generally consistent throughout. Considering the outperformance in the first half, should we expect that trend to continue into the second half? I understand you're not officially revising your guidance, but is there anything you would challenge about that straightforward interpretation based on the performance so far in the first half?

Mary Whitney, CFO

Sure. To reiterate what you've mentioned regarding our expectations for the year, you're correct. We anticipated a fairly even distribution with our goal for a 120 basis points margin expansion. Additionally, I noted earlier that the contributions from recycled commodities and RINs would be more significant in the first half and decrease over the year. It's important to remember that some of the benefits in the first quarter came from commodities, so if you're assessing the market now, you can expect that advantage to continue. Another factor to consider is that some of our strong performance on the revenue side came from M&A. As we pursue M&A, which usually has a slight dilutive effect if it involves a typical collection company, you'll want to include that in your expectations. Thus, as we think about updating in July, it seems appropriate to reevaluate those considerations given all these factors.

Kevin Chiang, Analyst

That's helpful. Regarding my second question, which is more about the broader picture of your in-house development, you mentioned a target of one-third. While I'm not sure if you have detailed insights, I'm curious about the movement of personnel between the broader transportation sector, such as truck drivers and maintenance workers, and those entering the waste sector. Given the ongoing freight recession, it seems likely that this could benefit recruitment for your company. As you consider the eventual end of the freight recession, how much volatility do you anticipate in your in-house development? Do you believe it will remain relatively steady throughout the freight cycle due to your offering of a better work-life balance, or could it become more challenging if the freight economy improves and compensation for long-haul trucking becomes more attractive than it currently is?

Ronald Mittelstaedt, President and CEO

Yes. Well, so let's take a step back, Kevin. I'll answer it in a little bit different way, but I think it will get to what you're asking. So traditionally, for us, and I would say most of the industry, remember, our largest 2 employee bases are, of course, CDL drivers and diesel technicians or mechanics. When we have had as a company and an industry, an opening for that, we have sought to pursue somebody who is a CDL driver or somebody who is a certified diesel technician, which means that we either have to find them unemployed or we have to steal them from another employer usually by a better compensation and/or structure for them. That in a tight economy is a vicious cycle. What we are doing by opening these academies that we are doing is we are actually pursuing a different type of employee. This is an employee who we are upskilling quite dramatically from where they are. So we are not bringing in somebody who has a CDL into our CDL driving academies. We are not bringing someone into our diesel technician partnership school for somebody that has a maintenance background. So this is a longer approach. It is a dynamic positive change to the impact of that type of employee. It is often an employee who has been with us for a period of time, so we know their character that we are making an investment in. We're also doing it from people on the outside. So an example would be, instead of hiring somebody with a CDL and taking them from another waste company or a trucking company, we're hiring someone who's been with Home Depot for 2 years as a forklift operator that has a great track record and safety culture, but it's another $10 an hour opportunity if we can get them their CDL, and it totally changes their life and I'd say the commitment to us. So that's why it won't be 100%, to my response to Michael Hoffman, but I think it will ultimately be 1/3. So I'm less concerned as we go into a tight economy, if and when we do, which, of course, we will, with us having this approach to help buffer that. It's another reason we're actually doing it.

Operator, Operator

Our next question comes from Noah Kaye from Oppenheimer.

Noah Kaye, Analyst

Ron, we talked last quarter about the $5 billion or so now fitting the market model for M&A and the internalization opportunities around the Northeast. I guess, just given your comments around this year potentially being one of the busiest ever and a recognition of what you've done already, just wondering if we could get some more color either around the regional mix that you see those opportunities and/or the kind of the profile of the types of acquisitions you're looking at.

Ronald Mittelstaedt, President and CEO

Sure. First, I’d like to mention that we have opportunities in all our solid waste regions, which includes five in the U.S. and one in Canada. We currently have active letters of intent and ongoing discussions in all these regions, primarily with our traditional solid waste companies—collection firms, integrated companies, and those with transfer stations. I wouldn’t emphasize any particular geography over another; the focus is more related to our competitive footprint, which has expanded. While franchise transactions and exclusive models tend to take longer to complete, we have several already signed, making the offerings quite balanced. This balance gives us confidence in potentially achieving a record year, aside from the year we completed a public merger. All of this pertains to our core solid waste business. We are concentrating on enhancing the utilization of our Arrowhead asset and increasing tonnage from that asset, which we acquired in August 2023. There are indeed transactions that will contribute to this growth, coming from areas ranging from the mid-South to the Eastern seaboard. We have a lot happening, and I believe that in the next couple of quarters, more clarity will emerge for everyone.

Noah Kaye, Analyst

And I was just reflecting on your comments to start the call about where you and the business sit a year later since you're coming back. And I guess, the question is too certain to declare victory, but you've made a lot of progress already on things like employee retention and turnover reduction. Where are your incremental focus areas at this point for operational improvement within the business?

Ronald Mittelstaedt, President and CEO

Thank you. I want to acknowledge the efforts of our local teams and regions in making improvements that we can now discuss. We will keep our focus on turnover, which I mentioned last year; it impacts everything from cost reductions to safety, customer satisfaction, and our capacity for additional volumes. This focus will enhance our overall performance, particularly in reducing voluntary turnover. We continue to emphasize risk management and pricing, and as we improve our operational and financial performance, we can accelerate growth both organically and through acquisitions. A year ago, we were limited in our ability to do this due to a high number of open positions which strained our organization. Although our focus remains the same, we now have more growth opportunities ahead. While we have various initiatives underway, including the use of AI in different sectors, we prefer not to set benchmarks publicly. Instead, we’ll let our improved margins reflect our progress. There is certainly room for technological enhancements in our operating platform in the coming years.

Operator, Operator

Our next question comes from Bryan Burgmeier from Citi.

Bryan Burgmeier, Analyst

Ron, I know it's only been 3 months since you've closed the SECURE acquisition. But I think in the last call, you mentioned the company is running about 22 of the 29 acquired facilities, and some of them maybe come back online this year. Is there any update there? I guess, I'm just curious what exactly is being assumed in guidance now. And if it's too soon to say, I totally understand. Maybe that's a better item for July or October.

Ronald Mittelstaedt, President and CEO

Yes, thank you, Bryan. First, the guidance does not expect any additional openings of the 7 closed facilities. I believe we will open up to 2 of them before year-end. We should have a clearer picture by July, but it's possible we will open 2 of the 7 that are currently closed before the end of the year, or right at year-end. Therefore, they may not contribute to 2024, but there will be some impact in 2025. We will continue to assess the remaining five facilities, and you will see various openings throughout 2025 and into 2026. Ultimately, I believe we will likely open 6 of the 7 additional facilities that we acquired.

Bryan Burgmeier, Analyst

Got it, got it. And last question for me, maybe just for Mary Anne, and apologies if I missed this. Can you remind us what your guidance is assuming right now for recycled commodity prices and RIN prices and then where Waste Connections stood with those items in 1Q?

Mary Whitney, CFO

Sure. So for 1Q, OCC was $130 a ton and RINs averaged $3.10. You did see OCC tick up a little higher over the course of the quarter, and it ended closer to $140. So we always mark to market. So basically, the assumption is they're around current levels. That's what is included in the guidance for Q2.

Operator, Operator

And our next question comes from Toni Kaplan from Morgan Stanley.

Hilary Lee, Analyst

This is Hilary Lee on for Toni. Great quarter, congrats. I just wanted to talk about margin a little bit kind of going back to Kevin's question. It looks like with the rest of the year potentially being evenly distributed, could possibly reach 34% by the back half of the year. So just wondering what would need to happen for you guys to get to that threshold. Or what could hold you back?

Mary Whitney, CFO

First of all, I want to note that in the guidance we provided for the full year, we indicated that in the third quarter, which is typically our strongest quarter, we would be nearing those levels. If you add 120 basis points to each of the four quarters, that brings you to 33.7%. Essentially, we've stated that we've exceeded expectations. As I mentioned, some of this is due to commodities, some is related to the core business, and some comes from acquisitions. These three factors will determine how close we get to that level or somewhere around it. However, I agree with your assessment. If things unfold in the upcoming quarters as they did in the first quarter, meaning we continue to see strong performance from those various factors, that target is definitely within reach.

Hilary Lee, Analyst

Got it. And because the 34% is well within sight, I guess, do you guys have another target in mind? Or anything that you guys are kind of reaching towards after that? I know it might be a little early to comment on that, though.

Mary Whitney, CFO

Well, we never meant for 34% to be a limiting factor. It was just almost more conversational because we've certainly been there before. But as you may recall, or some folks on the call may recall, we said that before we had closed the SECURE transaction and we said that SECURE would be about 50 basis points accretive to overall margins. And so I think that tells you we already have our head set well north of 34%.

Ronald Mittelstaedt, President and CEO

And I would also say, Hilary, that remember, that does not include $200 million of EBITDA from proposed and planned RNG facility openings in '26 or contribution that we've said. So it also did not include that.

Hilary Lee, Analyst

Great. And just lastly, I just want to know if you guys have an update regarding the New York City franchise process. Anything going on there? Any updates?

Ronald Mittelstaedt, President and CEO

No real updates. Everything is moving forward positively. We start the beta pilot for several zones on September 4th, right after Labor Day, and it will run for 90 days, almost until the end of the year. Additionally, the city requested a while ago for us to demo some electric vehicles, which we received in April, and we have begun operating them to evaluate their performance in various areas. These are minor updates, but that is the current status.

Operator, Operator

Our next question comes from Jerry Revich from Goldman Sachs.

Adam Bubes, Analyst

This is Adam on for Jerry today. Really strong M&A activity to date. I was just hoping to better understand the makeup of solid waste acquisitions year-to-date. So I think you referenced the acquisitions included a new market entry in Indiana, Michigan. Was that one deal or multiple deals? And how large of the $150 million did that represent? Just trying to understand that makeup a little bit better.

Ronald Mittelstaedt, President and CEO

Sure. The transaction we completed involved acquiring a company based in Elkhart, Indiana, near the Southern Michigan border, called Waste-Away. This is a remarkable third-generation company that is well-regarded in our industry and has a strong family ownership that was retiring. They had an excellent management team that we have retained. This acquisition accounted for over half of the additional $150 million in revenue that we reported. It was a significant acquisition by any measure, with approximately 300 employees across three locations. We finalized this deal within the quarter, and I can also mention that we are already in the process of closing our first acquisition in that area as well, expected in the middle of Q2.

Adam Bubes, Analyst

Great. I appreciate the color. And then you folks have achieved a really strong improvement in employee retention and turnover over the last 4 quarters or so. Can you just update us on where we are in seeing the benefits of lower turnover flow through the cost structure given there's a lag there?

Mary Whitney, CFO

Sure. So what we've talked about is that there's an incremental 100 basis points associated with improvement in several different line items. And as I mentioned earlier, we're starting to see those, for instance, on overtime and some of our third-party costs like subcontracting business. And so if I were to think about it in terms of that 100 in the aggregate, I'd say we're down at that maybe in the 10 to 20 basis points of the improvement is what we've started to see. Of course, we know that there are pieces of it that will lag even longer, most notably the cost of risk, which as we've described it, you can bring down your incidence in the current period, but you're still paying for incidence in prior periods. And so we're not surprised but that certainly continues to be a headwind rather than a tailwind and anticipate that, that takes multiple periods to start being recognized.

Operator, Operator

You next question comes from Tony Bancroft from GAMCO Investors.

Tony Bancroft, Analyst

Congratulations, Ron and team, on a great quarter. I have a long-term question regarding your recent acquisition of SECURE Energy. While I know your focus is on solid waste, are there any other opportunities you're considering? Also, looking ahead, do you see potential for more transformational moves with larger regional players? On the municipal side, have you noticed any trends with towns and municipalities potentially incurring higher costs when shifting to private operators?

Ronald Mittelstaedt, President and CEO

Let's break that down a bit. On the SECURE side, we've been strongly involved in the E&P business in the U.S. since 2012, primarily in drilling. The advantage of the SECURE transaction was that it matched our U.S. operations in size, but was the opposite in structure, with 85% of it being production. We appreciate that balance and the size of this combination. As we expand our core solid waste operations, this will naturally represent a smaller percentage of the company. However, we do see some incremental opportunities in this area. While they are smaller, they are valuable and will add to our operations, and we plan to continue pursuing these as we have in the U.S. Now, we also have the Canadian market to consider for these opportunities. As for any transformational changes, I would say it's unlikely. We're firmly established as a solid waste company, and that's our focus. We have significant potential in this field, which we understand well and can perform effectively in. This will remain our direction for the foreseeable future. We will evaluate opportunities that arise, particularly if regulations encourage local governments to divest assets that are valuable. We know this business well, but we're not looking to shift into different areas out of desperation for new opportunities. Any new ventures would need to have similar financial characteristics, defensibility, and growth prospects as our core operations, and we would thoroughly assess anything that meets those criteria.

Operator, Operator

Our next question comes from Tobey Sommer from Truist Securities.

Jack Wilson, Analyst

This is Jack Wilson on for Tobey. Can we maybe dig into those weather headwinds you're seeing and sort of what distinguishes those from normal seasonal weather patterns?

Ronald Mittelstaedt, President and CEO

Sure. I'll start by saying that weather is a regular occurrence every year, whether we like it or not. It typically impacts us most severely in the first quarter, especially here in North America. In January, we experienced extremely harsh weather on the West Coast and in parts of the mid-South and Southeast, with particularly low temperatures that prevented us from operating. There were markets where we could not function for 1 to 2 weeks. Facilities had to close, employees were sent home, and we were unable to operate because the Department of Transportation in those states, with Oregon as a prime example, prohibited transportation. This was not related to safety conditions; it was an unusual situation. We can manage cold weather and snow, but when authorities tell us not to be on the road, we comply. In Alaska, where we are the largest player, we expect severe weather. However, we faced over 60 inches of snow in just five days that halted operations there for 12 days. These situations illustrate how the weather hindered our ability to operate in certain areas.

Jack Wilson, Analyst

Okay. And then just one quick follow-up. If you do achieve that 1/3 of sort of in-house upskilled role fills, is it possible to quantify sort of the margin impact that might have?

Ronald Mittelstaedt, President and CEO

No. I would say no. The answer is I don't think it is. What I would say is it's part of how we believe there's 100 basis points plus, as we've said, in incremental margin improvement from these employee initiatives. And then I think there's just things that are too difficult to quantify in your consistency of your service quality, your ability to price and retain more price, your ability to pursue event jobs because you're fully staffed that right now you can't pursue, there's just a lot of those kinds of things. And just the ability to have a stronger overall company because a balance in everybody's life. So what that exact margin impact is, we would only be guessing right now.

Operator, Operator

And our final question today comes from James Schumm from TD Cowen.

James Schumm, Analyst

Nice quarter. Could you give an update on the Chiquita Canyon landfill? How are expenses tracking relative to your expectations? And do you expect to have to revise cost estimates higher, perhaps due to relocation or other ancillary charges?

Ronald Mittelstaedt, President and CEO

Yes. I can tell you that Chiquita is performing about as we expected at this point; it might be slightly ahead, which is actually positive because it indicates we're potentially making progress a bit faster than anticipated. Currently, we do not believe that the $160 million figure we shared will change or change significantly. To clarify, once a year we review our closure and post-closure accruals based on engineering estimates. As mentioned, this pertains to closure costs for our Chiquita landfill since it is in a closed section. We will assess that cost annually, and if any changes occur, we will address them. If they are substantial, we will communicate those changes. However, we don't foresee any material changes. This practice has been consistent across all our landfills for 26 years. While it is a larger, more public matter, especially considering the context of Southern California and related events, Chiquita is aligning with our expectations at this time.

James Schumm, Analyst

Okay. Great. And I recognize that we're only a few weeks into April, but wanted to know how Q2 is tracking relative to normal seasonal expectations thus far. Is there any color you can provide there?

Mary Whitney, CFO

As we said, the way we've guided, asserts that sort of normal seasonal ramp and probably too early to say, but nothing that suggest it's outside of anything extraordinary. It certainly hasn't been weather or anything else that would cause us to change our thinking on the quarter. But we'll look forward to letting you see how the quarter plays out.

Operator, Operator

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

Ronald Mittelstaedt, President and CEO

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

Operator, Operator

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