Vice President of Investor Relations, WASTE CONNECTIONS INC
Waste Connections Inc (WCN) IR - Gabelli 11th Annual Waste & Environmental Services Symposium
Tony Bancroft (Portfolio Manager) moderates a discussion with Waste Connections' Joe Box (IR) at the Gabelli Funds 11th Annual ...
About Joe Box
At the Gabelli 11th Annual Waste & Environmental Services Symposium on May 17, 2025, Joe Box, Vice President of Investor Relations at Waste Connections, discussed the company's operational strategy and financial outlook. Box stated that Waste Connections is differentiated by a market-based approach, with about 40% of its business in franchise or exclusive markets under long-term contracts and the remainder in secondary and rural markets. He said the company expects 50 to 80 basis points of margin expansion in 2025, which he described as effectively 100 basis points after accounting for commodity and foreign exchange headwinds, following 100 basis points of expansion in the prior year. Box noted that voluntary turnover, which he called the single most important metric for assessing location health, had declined from 25% in 2022 to about 12%, potentially contributing up to 100 basis points of margin benefit. Box also addressed several external factors. He described tariffs as "relatively minimal" for Waste Connections, estimating the risk at $10 to $15 million on a $1 billion capital expenditure base. He said the M&A pipeline remains "extremely attractive," with $4.5 to $5 billion of private companies fitting the company's criteria, and that he expects another outsized year of deal activity in 2025. On recycling, Box stated that fiber, particularly old corrugated cardboard, makes up two-thirds of the recycling basket, with prices declining from about $145 per ton in the second quarter to $100 per ton by year-end due to factors including port strikes and tariff threats. He added that the company has incorporated about 4.5% cost inflation into its full-year outlook, which he said is moderating relative to recent years.
Transcript (28 segments)
T
Tony0:00
We're honored to have Joe Box today with us, head of Investor Relations for Waste Connections. Waste Connections is the third largest waste service provider in North America, operating in 43 states and six provinces, as well as providing E&P waste treatment and disposal. Joe joined Waste Connections as head of Investor Relations in 2018. Waste Connections has 260 million shares outstanding, trades around $97 for a $51 billion market cap and $8 billion of net debt. We'll sit down and have a nice chat with Joe.
J
Joe Box0:32
Well, thank you very much, Tony, for having Waste Connections and including us this year. We appreciate it.
T
Tony0:36
Yeah, this is great. Great you're here, Joe. Maybe for those less familiar, you could give a quick overview of the Waste Connections model and how you have been able to achieve high performance in the industry.
J
Joe Box0:52
Absolutely, a great spot to start. Waste Connections is the third largest solid waste player in the US and Canada. We operate across 46 states and six provinces in Canada, and we're of the opinion that we're differentiated because we take a very specific market-based approach. If you look at our market breakdown, we're about 40% in franchise or exclusive markets where we essentially have 100% of the waste stream tied up in very long duration, very profitable contracts. And then the other 60% we've been very purposeful, selecting primarily secondary and rural markets where we could effectively be a big fish in a small pond. By doing that and either owning the only landfill in the market or one of two landfills, because we have the most density there, we typically have the lowest cost structure, which allows us to push price and retain it. When you put those two market structures together, ultimately it has led to pricing that has led the industry by 200 plus basis points, margins that have led the industry by 200 to 500 basis points, and free cash flow conversion that has normally been upwards of 500 to 1,000 basis points above our peers.
T
Tony2:20
We've talked about inflation this morning. From a cost inflation standpoint, what are you seeing there? Any notable changes in the environment? And if there is a change, how do you guys respond?
J
Joe Box2:35
I certainly appreciate you letting me present right as the market opens on a pretty volatile day. I saw that you're doing pretty well though, compared relatively, that's good. Look, we'll find out as these tariffs play out, but what we've incorporated into our outlook for the full year has been something like 4.5% cost inflation. Clearly something north of what we're seeing from a CPI basis, but it's fair to say it's moderating relative to what we've seen over the last several years. We were experiencing inflation in the high single digits back in 2022, and we saw that moderate last year toward the five-ish range, and it continues to moderate down. That's in line with what we're seeing relative to labor. Frontline labor is our largest cost, about 30% of our cost directly or 50% indirectly, so that's the best bogey to look at. Maybe let's jump into the tariff issue. Obviously we heard before that on a relative basis you guys are somewhat insulated. How could you break it down and give some color on how that impacts your business, good or bad?
Sure, it's a great question and probably question one or two that we're receiving from investors these days. The good news is tariffs are relatively minimal. We don't have any cross-border transactions occurring. If you look at our fleet, there would be some amount of exposure, but it's minimal. The majority of equipment we are ordering is being ordered and delivered in the same market it's being consumed. There's probably a small portion of chassis coming from Mexico, again not the norm, a small portion. And then obviously there are components on our fleet coming from other markets like Asia, so there would be some exposure there. But on the base of a capex number that's approximately a billion dollars in total fleet and total capex, you're probably looking at $10 to $15 million of risk as we understand it today. It's not material.
T
Tony4:55
Maybe we can jump into your sweet spot. You highlighted on your fourth quarter call that you expect an outsized amount of deal activity. Are you seeing any slowdowns or changes in mentality from potential sellers in the market? I know this is sort of Ron's the maestro here, but I'd love to hear your thoughts.
J
Joe Box5:20
Sure, I appreciate that. We provided some commentary six weeks ago when we reported Q4, so still relatively fresh. I do think it's fair to say that the pipeline continues to be extremely attractive. We had said when we reported Q4 that at that time we had already closed or had signed and expected to close in Q2 about $75 million. That's a pretty good head start relative to what we would define as a normal year of M&A being something like $200 to $250 million of annualized acquired revenue. We know there's a lot behind that. The typical business we're buying is a solid waste business, maybe $10 million of revenue would be our average. Clearly we do some stuff larger than that, but they're not really feeling the impact of the macro. We'll have to see how this all plays out, but as of right now, they don't have a ton of tariff exposure, so the reasons they're selling haven't changed, and they continue to be very much engaged in the selling process.
T
Tony6:31
You mentioned the pipeline. Maybe you could tease that out a bit and talk about what kind of businesses are in that pipeline. And I guess maybe I missed it, but just the pipeline size or the general size of it.
J
Joe Box6:49
Sure, sure. From an overall pipeline size standpoint, we're focused on the solid waste business. We know what's worked for us for the last 27 years, so we're going to continue down that path. From a size standpoint, there's probably about $20 billion in private companies between the US and Canada. Not all of that meets our specific market criteria where it's either franchise or exclusive or in a secondary or rural market, but about $4.5 to $5 billion of that does. That's actively what we're engaged in and working toward. The good news is that $4.5 to $5 billion is growing, probably at at least a mid single-digit clip. Meaning if we're only doing something like $200 to $250 million of acquired annualized revenue in a normal year, that would mean we're effectively buying the growth rate of that TAM, so it could go on for quite some time. This year we said we expect it to be another outsized year from an M&A standpoint. Last year it was a record year from a private M&A standpoint where we acquired $750 million of annualized revenue. We wouldn't expect it to be a repeat of that record, but could it be something north of that $200 to $250 million and in the $250 to $500 range? It certainly could be. That seems realistic given what we know today. And to your second point about what's in the pipeline, it's primarily solid waste deals, broad-based across a number of geographies. We report in six different regions, so there'll be activity across each one this year, which derisks the M&A integration to a certain extent because you're spreading it out. We also have some opportunities within the E&P business, which is a niche for us. You saw us last year acquire a business that was divested from Secure, about $225 million of the $750 million, and you'll probably see us continue to be active in that space this year.
T
Tony9:35
That's a lot of deals, Joe. Good stuff. You guys have always put out metrics around employee loyalty, strong momentum in operating metrics of voluntary turnover. Maybe you could talk about how that's going and what that means for the business.
J
Joe Box10:03
Sure. To set the table, if Ron were here today, he would tell you that if you were to parachute into any one of our 500 to 600 districts, the single most important metric to look at that would tell you about the health of that individual location would be voluntary turnover. Clearly it's going to have an impact on everything from safety to margins to employee morale to customer satisfaction to ability to integrate deals effectively across the system. So it's of critical importance. When Ron came back about 18 months ago, his first initiative was to double down on human capital and really try to reduce voluntary turnover from as high as 25% in 2022 to something like 10 to 12%. Candidly, we've seen a lot of good progress. It's down about 50% from where we started, and we've seen progress even post-2024. We ended the year a little bit sub-13 and we're certainly closer to 12 now. Continued progress on that front, and what we've said is that just by bringing down that number, the benefit that could occur in the margin is upwards of about 100 basis points, just from reductions in things like overtime or cost of risk. We've seen about a third of that and there's probably two-thirds to go.
T
Tony11:50
Well done. I couldn't agree more. In my former life, flying the most experienced squadron was way better than a bunch of newbies. Normally you point out price-led organic growth in 20 to 40 basis points of margin expansion, but last year you were up around 100 basis points. This year I think you said 50 to 80. Can you talk through that and give more granularity?
J
Joe Box12:20
That's a great question and a good point. The algorithm our business creates because of the model we have is focused on price-led organic growth. Typically it produces something like 4% to 6% organic growth, obviously price-led. If you're pricing in excess of your cost, what you should expect from a normal margin expansion standpoint would be something like 20 to 40 basis points. It's clearly been outsized. Last year we put up 100 basis points of margin expansion, from 31.5% to 32.5%. Part of that was the benefit of price organic growth, part was shedding some less profitable contracts, and probably 30 to 40 basis points of that was the benefit of reducing turnover. I'd be remiss not to mention that the acquisitions we completed last year were actually accretive to the margin as well, and we did have some tailwinds from commodity prices to get to that 100 basis points, but clearly that's outsized. As you think about this year, the 50 to 80 basis points is actually more like 100 basis points of underlying margin expansion, because we did start to see commodities, rebar and FX weaken in the fourth quarter. So at the lower end of our range at 50, you're talking about 50 basis points of drag from those items. The 100 basis points of margin expansion we're expecting this year on an underlying basis is really more of the same: price-led organic growth, shedding less profitable contracts, and probably another 30 to 40 basis points of turnover-related benefits. That would leave another 30 to 40 basis points of benefit to extract the full 100 into next year. So apples to apples, you guys are doing pretty well.
T
Tony14:43
Well done. There are a few items you expect to spend on in 2025: the Chiquita Canyon landfill mitigation and some more for our RNG. Maybe you could talk about how that plays out in future years.
J
Joe Box15:00
Sure. That's a great question because I mentioned at the outset that typically our free cash flow conversion has exceeded our peers by 500 to 1,000 basis points. Typically we convert about 48% to 50% of our EBITDA into free cash flow. That number has been lower over the last year and is expected to be lower in 2025 because we are spending on two unique items. One, we expect to spend about $100 to $150 million on a reaction occurring at one of our landfills in Southern California that we're trying to mitigate. That number is expected to step down to about $50 million next year and then negligible in future years. The second thing is RNG. We're actively engaged in developing about a dozen RNG sites. On a third of those, we are going to put up all the capital and keep the economics, about a $240 to $250 million spend over a couple of years. The bulk of that spend is expected in 2025, call it $100 to $150 million this year. If we spend $150 million at the high end, there's probably some negligible amount that rolls into next year. When you get into next year, you're anniversarying or experiencing moderation in these costs, and by 2027 they're effectively gone. At that point, you're looking at free cash flow conversion that arguably could be north of that normal range of 48% to 50% because our RNG projects that come online actually come online at a very accretive free cash flow conversion.
T
Tony17:08
Maybe let's switch to a volume update. Obviously you have a different business with your franchise model, but maybe you could discuss what you're seeing geographically and by line of business.
J
Joe Box17:20
Sure. What we've said is that over the last three years, we've seen essentially no growth in the macro. If you go back to the anniversary of the pandemic in Q1 of 2022, we've effectively seen between down 1% and up 1% on all our key operating metrics, whether landfill tons or roll-off pulls. It's largely oscillated in that tight range. Being in 46 states and six provinces with this market-based model, we would see the volume if it were there, and it just hasn't been. As we moved into the back half of last year with some political uncertainty around the election and question marks on interest rates, we did start to see a little more moderation on roll-off polls in particular, which is our more construction-centric business representing about 10% of our overall book. That had been trending in the down mid-single digits in Q4, and we're not really seeing much difference so far year-to-date in 2025. From a macro standpoint, it would be nice to go back to a period of 3% growth with legitimate consumption of goods, population growth, and net new business formation, because we feel like we really haven't seen it over the last three years.
T
Tony19:11
Yeah, I guess that would play into the special waste business as well. Any potential for pent-up demand on the special waste side?
J
Joe Box19:25
That's a great follow-up. On the special waste side, special waste for us would generally be contaminated soils that come into our landfills, which could be as much as 25% of the tons at a landfill, but it's really only about 2% to 3% of our total revenue. It can be economically sensitive because it's usually some speculative development or industrial work happening. It's been subdued just like all other growth metrics we've seen. The good news is it's coming from a fairly low perch in 2024, so any incremental activity we see would just be upside.
T
Tony20:14
Maybe I'll open the floor up to the audience. If not, I've got a lot more questions. Joe, you did briefly talk about the housing market, but maybe you could go into more color. You said what you're seeing currently is pretty muted, but going forward there's probably a lot of opportunity depending on interest rates. Maybe you could give your company's view on how you're looking at that.
J
Joe Box20:46
We never try to place a bet one way or the other; we always like to give the status quo of where things are. Look, I think it's completely fair to say that we've underbuilt housing for a long time. Given our broad geographic exposure, any housing construction or increase in starts we see would benefit us in terms of incremental roll-off pulls. It's hard for us to sit here and say whether there's going to be upside or not. We clearly haven't baked it into our guidance. So if you were to see some upside from a volume standpoint, that would be incremental.
T
Tony21:38
Maybe we could switch to the sustainability and recycling side. You already talked about commodity prices and how that has impacted margins, but what are you seeing on recycling? We had a company just previously talking about packaging, so maybe you could talk through the different aspects.
J
Joe Box22:03
Absolutely. To set the table, recycling for us, we offer it to 50% of our customers. It's a core service we want to provide. As a percentage of revenue, it's approximately 2% to 3%. What you're looking at when you see our line of business breakdown is the tons we're processing through our recycling facility and then selling those tons on the back end. The most impactful piece would be fiber, which represents about two-thirds of the basket, specifically old corrugated cardboard or OCC, which would be about 50% of the overall basket. There we actually saw some price degradation as we moved into the back half of last year. OCC was around $145 a ton in Q2, and we saw it exit the year closer to $100 a ton. There were a number of unique variables that drove that down, including the port strike and the threat of tariffs. But what we're seeing from our internal team is that it's actually quite balanced in the market right now. As we seasonally move into a stronger period from a mill production standpoint and into a period of less generation of OCC being provided to mills, there could be some upside to OCC pricing. We wouldn't normally make any sort of call relative to pricing, but it does feel like the market is in balance and we could see some seasonal lift. I'll caveat that by saying let's see what happens to the macro post today, but we feel like it's a different environment than what we've seen. And just to go one more, going back to RNG, you talked about a third you essentially sponsored, a third you backed. What's the thought process on backing versus being in a supporting role and letting a third party come in?
Sure. On the dozen projects or so we're developing, it really comes down to several things. One is risk and attractiveness. If there's a low-risk project where we're aware of the gas stream and construction is also lower risk, that might be something we cherry-pick and do on our own. The second thing we look at is the existing structure. We currently have about 20 electrical generating facilities, which is the older way the industry processed gas over the last 25 years. Those 20 facilities are tied up in contracts with partners. That structure really dictates what the structure would be going forward. We experienced a number of those partners coming to us and saying, hypothetically, if you have 10 years remaining on this contract and you'd be willing to partner with us on a new RNG project, we will rip up this old electrical generating project contract and effectively share in the upside of a bigger pie. You're seeing us do that on a number of projects, and that's ultimately what has determined the two-thirds, one-third split.
T
Tony25:50
Very interesting, Joe. Great job. Company's doing obviously very well, has done very well. Thank you for coming every year. We appreciate your support and hope to have you back next year.
J
Joe Box26:01
Thank you. Thank you for the interest and thank you for everybody's attention.