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Waste Connections, Inc. (WCN) Q4 2022 Earnings Call Transcript

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Waste Connections, Inc. (NYSE:WCN) Q4 2022 Earnings Conference Call February 16, 2023 8:30 AM ET

Company Participants

Worthing Jackman - President & CEO

Mary Anne Whitney - EVP & CFO

Conference Call Participants

Jerry Revich - Goldman Sachs

Toni Kaplan - Morgan Stanley

Kevin Chiang - CIBC World Markets

Walter Spracklin - RBC Capital

Noah Kaye - Oppenheimer

Tyler Brown - Raymond James

Michael Hoffman - Stifel

Chris Murray - ATB Capital Markets

Stephanie Moore – Jefferies

Kyle White - Deutsche Bank

Stephanie Yee - JPMorgan

Operator

Good morning, and invited to nan Waste Connections Fourth Quarter Earnings Call. All participants will beryllium successful listen-only mode. [Operator Instructions] After today's presentation, location will beryllium an opportunity to inquire questions. Please statement that this arena is being recorded.

Now I'd for illustration to move nan telephone complete to Mr. Worthing Jackman. Please spell ahead.

Worthing Jackman

Thank you, operator, and bully morning, everyone. I'd for illustration to invited everyone to this convention telephone to talk 4th fourth results and our outlook for some nan first 4th and afloat twelvemonth 2023. I'm joined this greeting by Mary Anne Whitney, our CFO and respective different members of elder management.

As noted successful our earning release, Q4 topped disconnected an bonzer twelvemonth for Waste Connections, highlighted by continuing outperformance during nan play and providing a higher introduction constituent and enhanced visibility for 2023. Strong operational execution and complete 10% coagulated discarded pricing on pinch acquisitions closed during nan period, erstwhile again, provided for amended than expected results. We much than offset inflationary pressures and commodity-related headwinds to grow adjusted EBITDA separator by 30 ground points, excluding nan separator dilutive effect of acquisitions completed since nan twelvemonth agone period.

Looking astatine nan afloat year, double-digit percent maturation successful some gross and adjusted EBITDA on pinch adjusted EBITDA margin description , excluding nan effect of acquisitions, continued to differentiate our results. We overcame elevated wage, substance and inflationary pressures and a 70% driblet successful recycled commodity values successful nan 2nd half of nan year, pinch an acceleration successful pricing during nan year, providing momentum for higher halfway pricing successful 2023.

Acquisition activity during nan twelvemonth besides outpaced expectations for a full of astir $640 cardinal successful acquired annualized revenues, which on pinch activity year-to-date, already provides acquisition publication of 5% successful 2023 pinch further speech ongoing.

In short, tremendous operational execution successful 2022 has provided extracurricular visibility for double-digit apical statement maturation on pinch adjusted EBITDA separator description successful 2023, pinch upside from immoderate betterment successful betterment commodity values aliases inflationary pressures, arsenic good arsenic incremental acquisition activity during nan year.

Before we get into overmuch much detail, fto maine move nan telephone complete to Mary Anne for our forward-booking disclaimer and different housekeeping items.

Mary Anne Whitney

Thank you, Worthing and bully morning. The chat during today's telephone includes forward-looking statements made pursuant to nan safe harbor provisions of nan US Private Securities Litigation Reform Act of 1995, including forward-looking accusation wrong nan meaning of applicable Canadian Securities Laws. Actual results could disagree materially from those made successful specified forward-looking statements, owed to various risks and uncertainties. Factors that could origin existent results to disagree are discussed some successful nan cautionary connection included successful our February 15th net merchandise and successful greater item successful Waste Connections' filing pinch nan US Securities and Exchange Commission and nan securities commissions aliases akin regulatory authorities successful Canada. You should not spot undue reliance connected forward-looking statements arsenic location whitethorn beryllium further risks of which we are not presently alert aliases that we presently judge are immaterial, which could person an adverse effect connected our business. We make nary committedness to revise aliases update immoderate forward-looking statements successful bid to bespeak events aliases circumstances that whitethorn alteration aft today's date.

On nan call, we'll talk non-GAAP measures specified arsenic adjusted EBITDA, adjusted nett income attributable to Waste Connections connected some a dollar ground and per diluted stock and adjusted free rate flow. Please mention to our net releases for a reconciliation of specified non-GAAP measures to nan astir comparable GAAP measures. Management uses definite non-GAAP measures to measure and show nan ongoing financial capacity of our operations. Other companies whitethorn cipher these non-GAAP measures differently.

I will now move nan telephone backmost complete to Worthing.

Worthing Jackman

Thank you, Mary Anne. First off, I'd for illustration to admit and applaud nan efforts of our section teams, whose execution astir notably complete nan past fewer years successful nan look of arguably nan astir challenging operating situation has continued to thrust differentiated results. In 2022, our 25th day year, we erstwhile again demonstrated 2 hallmarks of Waste Connections; sustainability, and sustaining ability. There should beryllium nary trade-off betwixt nan two.

As noted earlier, we're highly pleased pinch our beardown operating and financial capacity successful Q4 and passim '22 arsenic we overcame elevated wage, substance and inflationary pressures and a 70% driblet successful recycled commodity values to thrust adjusted EBITDA separator description , excluding acquisitions successful nan year.

In 2022, we besides delivered pricing of 9.2%, much than 200 ground points supra our first outlook and astir 85% of which wasn't halfway price. Moreover, fixed nan acceleration of pricing during nan year, nan lagging use of higher CPI resets and a beardown commencement to nan New Year were already group up for pricing to summation sequentially by astir a 100 ground points from nan 4th fourth to 11.5% successful Q1 and to mean astir 9.5% successful 2023, fundamentally each successful halfway price.

We delivered adjusted free rate travel of $1.165 cardinal successful 2022, up complete 15% year-over-year connected CapEx of $913 cardinal up 23% year-over-year, reflecting a purposeful measurement up successful CapEx during nan twelvemonth for opportunistic existent property purchases. Net of plus sales, CapEx was astir $30 cardinal supra our outlook successful spite of ongoing proviso concatenation constraints for fleet and equipment.

As noted successful our property release, we've been navigating nan uncertainties successful shaper transportation timing, and now expect to return transportation of an further $50 cardinal successful fleet successful 2023, that was primitively expected successful 2022. Our 2022 CapEx besides included astir $75 cardinal for sustainability related projects, which was astir $25 cardinal little than we primitively had expected, chiefly for nan 2 R&D accommodation and 2 recycling accommodation we've antecedently discussed, that will full astir $150 cardinal ones completed. Our 2023 sustainability CapEx is expected to beryllium up from 2022 owed to nan timing of immoderate of nan expected 2022 outlays that drifted into this year, arsenic good arsenic nan expected initiation of improvement of an further ample R&D task astatine a precocious complete acquisition.

As we person described previously, these R&D accommodation are strategical investments pinch charismatic paybacks astatine scope of values for recovered resources. With nan further task noted, our aggregate superior outlays for owned R&D projects are now approaching $200 cardinal betwixt 2022 and 2025. These projects, on pinch complete a twelve others we've collaborated connected are blimpish to -- are conservatively estimated to make an incremental $200 cardinal of EBITDA successful 2026 aliases astir a $1 of EBITDA per dollar of CapEx.

Provisions successful nan precocious promulgated Inflation Recovery Act would further heighten expected returns and could supply tax-related benefits arsenic soon arsenic 2023 arsenic 1 of nan caller plants is scheduled to beryllium online and commencement contributing successful nan 2nd half of this year. As we person consistently emphasized successful our attack to ESG, these projects are integral to our business, accordant pinch our attraction connected worth creation and additive to our maturation strategy, not thing successful lieu of acquisitions.

Looking adjacent to acquisitions, successful 2022, we closed astir $640 cardinal successful annualized revenue. We completed 24 acquisitions each successful coagulated discarded and dispersed crossed nan US and Canada, successful some franchise and caller competitory markets, including integrated markets, caller marketplace entries, and a number of tuck-ins to existing operations. This robust activity successful 2022 capped six consecutive outsized years RAC acquired annualized revenue, totalling complete $2.1 cardinal since 2017, and we've had different beardown commencement to nan twelvemonth successful 2023. As always, we support a subject attack to marketplace selection, nan consequence profiles we judge and evaluations we wished to beryllium appropriate.

Since twelvemonth end, we've closed different integrated West Coast franchise pinch complete $35 cardinal successful annualized revenue, which on pinch nan rollover publication from deals completed successful 2022 already provides for 2023 acquisition publication of complete 5%. Continued speech sets up nan imaginable for different outsized twelvemonth of activity for which we stay good positioned, having entered 2023 pinch leverage beneath 3 times, successful spite of acquisition outlays of complete $2.3 cardinal during 2022.

Our equilibrium expanse spot and free rate travel floor plan supply elasticity for continued elevated levels of investments successful our integrated coagulated discarded maturation strategy, on pinch renewable power projects and coagulated discarded acquisitions, while besides expanding our return of superior to shareholders.

In 2022, we returned $668 cardinal to shareholders done dividends and opportunistic stock repurchases, up astir 20% from nan anterior twelvemonth and we invested complete $3.2 cardinal successful CapEx and acquisitions for early growth.

Now I'd for illustration to walk nan telephone to Mary Anne to reappraisal much successful extent nan financial highlights of nan 4th fourth and supply a elaborate outlook for Q1 and afloat twelvemonth 2023, each past wrap up earlier heading successful nan Q&A.

Mary Anne Whitney

Thank you, Worthing. In nan 4th fourth gross of $1.869 cardinal was $24 cardinal supra our outlook and up $245 cardinal aliases 15.1% year-over-year. Acquisitions completed since nan twelvemonth agone play contributed astir $153 cardinal of gross successful nan 4th aliases astir $150 cardinal nett of divestitures.

Total Q4 value of 10.6% included 9% successful halfway price, which stepped up sequentially by 70 ground points from Q3. Reflecting our highest levels successful 2022, Q4 full value ranged from astir 6% successful our mostly exclusive marketplace Western region to betwixt astir 11% and complete 13% successful our competitory markets.

The pricing acceleration successful competitory regions during 2022 on pinch nan lagging use from higher CPI linked marketplace increases successful '23 positioned america for astir 9.5% full value successful 2023, fundamentally each core, pinch complete 75% of that pricing already mostly successful spot astatine this clip for now.

Solid wastes volumes successful Q4 were down 1.7%, excluding 80 ground points from nan last quarterly effect from nan purposeful non-renew renewal of 2 municipal contracts noted passim 2022. Volumes were successful statement pinch our expectations successful spite of nan terrible wintertime upwind successful precocious December.

Looking astatine year-over-year results successful nan 4th fourth connected a same-store basis, commercialized postulation gross was up 14%, mostly owed to price, rotation disconnected polls per time were astir level pinch gross per up 9% and landfill rates per ton were up astir 7.5% connected regular tongues, down astir 2% pinch MSW and typical discarded each down 3% to 4%, partially offset by higher C&D discarded up 7%. And finally, E&P discarded gross of $53 cardinal was successful statement pinch nan anterior 4th and up much than 50% year-over-year.

Looking astatine Q4 revenues from recycled commodities, excluding acquisitions, recycled commodity revenues were down astir 70% year-over-year, astir arsenic expected owed to nan precipitous diminution successful values since July, which has continued done November. Prices for OCC aliases aged corrugated containers declined astir 60% sequentially from Q3 to average, astir $56 per ton successful Q4. OCC pricing has been comparatively unchangeable since November successful nan scope of $55 to $60 per ton pinch immoderate caller indications of improvement.

Finally, looking astatine year-over-year landfill state income and renewable power credits for RINs, landfill state revenues were up nominally successful Q4 pinch little RIN values offset by higher values. RIN values averaged astir $2.65 cents successful Q4 and person since declined to levels astir $2. Adjusted EBITDA for Q4 is reconciled successful our net merchandise was $564 cardinal up 13.8% year-over-year, and astir $11 cardinal supra our outlook, driving adjusted EBITDA separator of 30.2%, a 20 ground constituent hit to our outlook.

Margin successful nan 4th was up 30 ground points year-over-year, excluding nan effect of acquisitions, arsenic we much than overcame nan toughest quarterly comparisons, including almost 150 ground points successful headwinds from little recycled commodity values.

Moving to afloat twelvemonth adjusted free rate flow; we converted complete 52% of adjusted EBITDA to adjusted free rate travel supra our outlook astatine $1.165 cardinal aliases 16.2% of revenue. We over-delivered successful spite of an incremental $30 cardinal successful CapEx arsenic we opportunistically made definite existent property purchases during nan year.

As Worthing noted, our 2022 CapEx is besides noteworthy for what it doesn't include, that is astir $50 cardinal successful fleet owed to shaper transportation delays, arsenic good arsenic astir $25 cardinal successful sustainability related outlays, each of which were expected successful 2022 and are now included successful our outlook for 2023 CapEx.

I will now reappraisal our outlook for nan first 4th and afloat twelvemonth 2023. Before I do, we'd for illustration to punctual everyone erstwhile again that existent results whitethorn alteration importantly based connected risks and uncertainties outlined successful our authorities harbor connection and filings we've made pinch nan SEC and nan Securities Commissions aliases akin regulatory authorities successful Canada. We promote investors to reappraisal these factors carefully. Our outlook has assumes nary alteration successful nan existent economical environment. It besides excludes immoderate effect from further acquisitions that whitethorn adjacent during nan remainder of nan twelvemonth and disbursal of transaction-related items during nan period.

Looking first astatine nan afloat twelvemonth 2023, gross successful 2023 is estimated astatine $8.05 billion. For coagulated waste, we expect pricing of astir 9.5%, fundamentally each halfway and volumes successful nan scope of level to down 1%, positive astir $360 cardinal of estimated gross successful 2023 from acquisitions already completed and E&P discarded activity and values for recovered commodities assumed successful statement pinch caller levels.

Adjusted EBITDA 2023 arsenic reconciled successful our net merchandise is expected to beryllium astir $2.5 cardinal for astir 31.1% of revenue, up 30 ground points year-over-year successful nan look of astir 100 ground points successful headwinds from recycled commodity and RIN values. Said different way, adjusted EBITDA separator guidance is up 130 ground points twelvemonth complete year, excluding those 2 commodity drags.

Any moderation successful inflationary trends, increases successful nan values for specified recovered commodities aliases an EMP discarded activity aliases further acquisitions closed during nan year, would supply upside to our 2023 outlook. To beryllium clear, our outlook does not presume immoderate betterment successful recycled commodity values from earlier this year, which for instance, would adhd $10 cardinal successful yearly gross for each 10% move successful value levels, aliases successful RIN values, which would adhd astir $5 cardinal successful yearly gross for each 10% move-in value levels, some of which pinch very precocious travel through.

We're encouraged by nan betterment we're proceeding astir successful February for recycled commodities pinch prices successful immoderate markets reported to already beryllium up much than 10% from caller lows. That said, we person not factored immoderate specified pickup into our outlook.

Interest disbursal is estimated astatine astir $255 million, and our effective taxation complaint for 2023 is expected to beryllium astir 22% pinch immoderate quarter-to-quarter variability. Adjusted free rate travel successful 2023 arsenic reconciled successful our net merchandise is expected astatine $1.225 cardinal connected CapEx of $925 million, including $50 cardinal successful delayed fleet transportation successful nan anterior twelvemonth arsenic noted earlier. We besides expect astir $30 cardinal successful plus waste proceeds chiefly associated pinch excess accommodation we've either replaced aliases exited. Given nan expected timing of CapEx and different outflows this year, adjusted free rate travel is expected to commencement nan twelvemonth comparatively little successful Q1 and ramp higher successful nan consequent quarters.

Turning now to our outlook for Q1 2023, gross successful Q1 is estimated astatine astir $1.895 billion. We expect value positive measurement maturation for coagulated discarded of 10.5% connected pricing of astir 11.5% and E&P discarded gross of astir $45 million, reflecting emblematic seasonality. Recovered commodity values are expected to stay successful statement pinch caller levels.

Adjusted EBITDA successful Q1 is estimated astatine astir 30% of revenue, aliases $568 cardinal successful what sets up arsenic nan toughest quarterly comparison successful 2023 for recycled commodities and RINs. Depreciation and amortization disbursal for nan first 4th is estimated to beryllium astir 13.2% of revenue, including amortization of intangibles of astir $38.5 cardinal aliases $0.11 per diluted stock nett of taxes. Interest expense, nett of liking income is estimated astatine astir $67 million, and nan taxation complaint is estimated astatine astir 22%.

And now fto maine move nan telephone backmost complete to Worthing for immoderate last remarks earlier Q&A.

Worthing Jackman

Thank you, Mary Anne. Our results successful 2022 and positioning into 2023 are testament to nan civilization of accountability that has been nan cornerstone of Waste Connections' 25-year history of outperformance and worth creation. We are proud of our accomplishments successful 2022 and grateful for nan committedness of our complete 22,000 labor whose tireless efforts positioned america not only to flooded nan challenges of 40-year precocious inflation, compounded bio-dramatic drop-off successful recycled commodity values during nan year, but besides to look a much cohesive and resilient team.

Moreover, their efforts person positioned america for double-digit gross growth, on pinch nan set EBITDA separator description successful 2023 pinch industry-leading free rate travel conversion. And to beryllium clear, that's each without immoderate assumed betterment from multi-year debased recycled commodity and RIN values, causing an expected 100 ground constituent separator headwind.

We're encouraged by indications that we whitethorn already beryllium disconnected those lows and look guardant to realizing upside from sustained betterment successful these recovered commodities, arsenic good arsenic immoderate moderation successful inflationary unit aliases further M&A activity, again, sustainability and sustaining ability.

We admit your clip today. I'll now move this telephone complete to nan usability to unfastened up nan lines for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We'll now statesman nan question-and-answer session. [Operator instructions] First mobility will beryllium from Jerry Revich, Goldman Sachs. Please spell ahead.

Jerry Revich

Good morning. I wonderment if you folks tin conscionable grow connected nan separator cadence, implied by guidance. So conscionable looks like, pinch nan first 4th outlook you're mounting up to beryllium exiting nan twelvemonth pinch margins up, telephone it 80 ground points twelvemonth complete twelvemonth successful nan 4th fourth and seasonally adjusted separator complaint that's person to 31.5%.

And I'm wondering, arsenic we deliberation astir what '24 mightiness look like, it looks for illustration you've sewage immoderate earthy momentum moreover earlier reasoning astir what commodity prices do to thrust a twelvemonth of outsized separator betterment successful '24. I'm wondering if that cadence is accordant pinch really you're reasoning astir nan flows.

Worthing Jackman

Well, I'll commencement pinch nan '24 study and manus it disconnected to Mary Anne for nan quarterly progression successful nan year. But I deliberation you're correct pinch regards to '24, arsenic overmuch arsenic we said this twelvemonth is an outsized separator description year, excluding nan headwinds from betterment commodities, evidently they person a 100 ground constituent headwind and guideline up 30 ground points, it intends nan underlying is up 130 and we typically talk astir being up to a targeted 20 ground points to 40 ground points, not 130 ground points.

If you move into adjacent year, again, you've sewage nan franchise markets printing, pricing for adjacent year, agency CPIs we're seeing during nan twelvemonth this twelvemonth by mid-year and truthful evidently nan pricing wrong nan franchise markets should enactment successful that 6% positive aliases minus range. We're printing 7 this twelvemonth arsenic ostentation moderates into adjacent year, if ostentation does mean for illustration nan pundits deliberation 3 to 4%, what you're seeing adjacent twelvemonth successful nan franchise markets is really much of nan recapture of what we couldn't get successful '22. So that becomes an outsized year.

And again, arsenic you know, wrong our wide pricing structure, we typically transcend CPI by astir 150 ground points aliases more. And so, adjacent twelvemonth should enactment that mixed with, again, improving recycling values if it steps up during nan year, should supply for different above-average separator description for nan afloat twelvemonth supra nan emblematic 20 ground points to 40 ground points, now pinch regards to nan travel during nan year.

Mary Anne Whitney

Sure. Thanks Worthing. So Jerry, erstwhile you deliberation astir nan travel during nan year, I deliberation that astir instructive measurement to travel astir it is to look astatine what nan headwinds do. And if you look astatine that 100 ground constituent headwind complete nan people of nan aerial from recycled commodities and RIMs, it's heavy weighted to nan first 2 quarters. So if you person astir 150 ground points headwind of each of nan first 2 quarters, that gets astir trim successful half successful Q3 and fundamentally goes distant by q4.

If you conscionable played that through, you tin spot how, to your point, you'd person nan toughest comparison earliest successful nan year, and we've already guided to Q1, which by nan way, beautiful akin nan measurement we guided Q4. And past you'd spot nan improvement, you'd spot nan ramp complete nan people of Q1 to Q4 of people pinch nan overlay of seasonality and your highest reported 4th still being Q3 would beryllium nan likelihood could be, nan cadence location is Q3, Q2, Q4, Q1 successful position of seasonality. But nan astir important thing, I deliberation astir '23 is nan headwinds diminishing complete nan people of nan year, moreover earlier we spot immoderate improvement.

Jerry Revich

Super. Thank you. And tin I conscionable displacement gears a small bit, talk astir R&D, since your past nationalist comments, nan EPAs rollout of RINs and wide model really fundamentally blesses R&D arsenic an effective biofuel and pinch that context, I'm wondering if we could talk astir what number of sites that you folks person that don't presently monetize state successful nan scheme could yet complete clip if you get permitting, etcetera monetize state astatine economically viable levels.

And, separately, evidently tons of specifications to beryllium worked retired connected RINs, but I'm wondering if you'd beryllium consenting to stock really overmuch e power your state to electrical accommodation are generating adjusted for your ownership position?

Worthing Jackman

Well, I deliberation yeah, I deliberation you almost answered nan mobility wrong really you asked it, which is there's still a batch of specifications to beryllium worked out. And our position connected eRINs correct now is to hold till nan last rules get promulgated this twelvemonth earlier providing immoderate hypothetical remark connected it because thing again correct now would conscionable beryllium hypothetical, right?

Clearly eRINs provides optionality for nan projects we do person underway arsenic we comparison 1 RNG versus eRIN approach, but I still deliberation it's remains to beryllium seen who really owns nan eRIN pinch regards to nan OEMs versus generators, etcetera. So let's -- our position is let's hold until nan last rules get promulgated and past we'll make immoderate remark comments connected it.

Jerry Revich

Fair enough. Worthing, I'm wondering, you conscionable remark connected nan number of accommodation portion of nan question. So what's not monetized yet wrong your footprint successful position of number of accommodation location could get monetized?

Worthing Jackman

Well, we presently person electrical procreation accommodation astatine 17 of our sites.

Operator

Thank you. Next mobility will beryllium from Toni Kaplan, Morgan Stanley. Please spell ahead.

Toni Kaplan

Thanks truthful much. Wanted to inquire astir volume, you person nan expiring contracts moving done successful '22. So that was an effect there, but it did look that measurement is getting progressively softer. You did person immoderate reliable comps but wanted to talk astir benignant of, is it value subject aliases is it nan typical discarded that you called retired past 4th aliases thing else? And it seems for illustration you are implying a small spot of use aliases betterment I should opportunity successful '23.

So, conscionable wanted to inquire astir it and really conscionable nan normalized level, I cognize nan expiring contracts are benignant of rolling off, truthful that'll help.

Worthing Jackman

Yeah, we deliberation astir this manufacture arsenic much of a benignant of a positive 1 minus 1 type measurement industry. Obviously it's a large much of a fixed value work based business. Episodically, whether it beryllium done typical discarded aliases caller statement wins that could push measurement supra nan 1% episodically wrong gravitational propulsion benignant of brings it backmost wrong that range. Obviously past twelvemonth we talked astir nan purposeful shedding of 2 contracts that pushed reported volumes beneath nan antagonistic 1%, but we said, hey, adjusted for that. it's, it was still staying nicely betwixt nett zero and antagonistic one. And we look astatine this twelvemonth arsenic likely, different twelvemonth of zero to antagonistic one.

Episodically, location whitethorn beryllium a mates things that do thrust america supra zero into nan affirmative connected immoderate 1 quarter, but we'll hold to spot really nan twelvemonth plays retired connected that. The important point evidently successful this situation is price. The important point is halfway price. And that's why we're pleased that nan 9.5% and halfway value are regarding to for nan year.

Mary Anne Whitney

And nan only point I'd adhd to that Toni, would beryllium that, we'd opportunity there's really been nary change, nary discernible alteration successful immoderate of nan trends we've seen. If you deliberation astir it, rotation disconnected polls person been successful that level to benignant of up a constituent aliases 2 landfill volumes person been flattish to down a small spot each twelvemonth long. I look astatine January numbers, they're not materially different. Maybe January's a small amended than December was. There's ever a small sound successful nan winter, but nan cardinal is that, that we haven't seen immoderate marketplace alteration really for nan past twelvemonth aliases so.

Toni Kaplan

Great. And I was hoping you could talk astir your sustaining expertise wrong sustainability. My mobility really is, do you spot sustainability arsenic being a bigger portion of your strategy successful nan future? I cognize you gave nan EBITDA use and nan CapEx, but conscionable broadly, I conjecture possibly conscionable talk astir your differentiators versus peers successful nan sustainability area?

Worthing Jackman

Well, first off, we've ever noted that, you know, our chat of sustainability efforts person been halfway to who we've been for 25 years. It's conscionable we're, we're speaking much astir it these past fewer years and telling our story, right? So I deliberation we're -- I deliberation we are getting a small spot amended astatine being much transparent astir what's been going connected done these years.

Obviously, our return and position connected finance successful it is simply a balanced position of projects we ain versus projects we partner on. And again, that attack arsenic we talked astir is nan dollar for dollar return of EBITDA for CapEx dollar deployed successful nan aggregate, but it doesn't alteration who we are. I deliberation our, nan chat astir sustainability really is 1 of reminding folks that sometimes nan pendulum swings from execution each nan measurement complete to from five-year retired promises connected sustainability and what it mightiness deliver.

I deliberation we're proud to attraction connected some what we're doing 4th successful 4th route, twelvemonth in, twelvemonth out, really our folks measurement up to, we've talked about, again, immoderate of nan astir challenging operating environments we've seen these past fewer years, and we're proud to talk astir nan twelvemonth and now.

And truthful I deliberation we've complete 25 years, if you want to specify opinionated ability, I deliberation it's that capacity you've seen complete 25 years and, and hopefully that pendulum that swings from execution to sustainability and really swung difficult to nan sustainability broadside from conscionable a speech connected nan market. Hopefully that's drifting backmost much to a much balanced position of some execution and sustainability.

If group tin perceive america we're calling nan usability to cheque successful connected what's happened to nan call, but can't perceive anyone. That's interesting. Well, I could inquire myself questions and we could. I could question and reply myself. Yeah, we're trying to correct this. They tin perceive us. Evidently we can't perceive them. Not a bad idea. If you person a question, conscionable email Mary Anne and myself, and we'll publication nan mobility and reply it.

Operator

Pardon me, this is nan operator. Are you fresh for your adjacent question?

Worthing Jackman

Yes, Nick, convey you. If you could fto nan adjacent mobility travel through.

Operator

Yes, that's Kevin Chiang - CIBC. Please spell ahead.

Kevin Chiang

Thanks and bully morning. Maybe if I could conscionable talk astir nan M&A pipeline, if I look astatine possibly nan mean size of nan deals, they steadily accrued nan past fewer years and really saw Mark jump successful 2022. And I'm conscionable wondering, it sounds for illustration we should expect different outsized twelvemonth successful 2023, but, nan creation of that pipeline changed astatine each i.e. are you seeing larger companies for sale? Are you seeing possibly nan pipeline getting bigger successful position of -- successful position of what you'd look astatine arsenic a tuck successful acquisition, beryllium absorbing conscionable fixed immoderate of nan trends we've seen successful position of benignant of nan mean size per woody nan past fewer years?

Worthing Jackman

Sure, and you're right, Kevin, location been some, what I would telephone much outsized transactions, companies pinch $50 million, $60 million, $80 cardinal aliases $100 cardinal type gross profile. But you look, an mean twelvemonth for america is 15 transactions to 18 transactions that mightiness beryllium 2 to 4 caller marketplace entries between, $20 cardinal and $40 cardinal of revenue. And it mightiness beryllium 10 tuck-in aliases 12 tuck-in aliases benignant of marketplace description up acquisitions that could beryllium arsenic debased arsenic $1 cardinal aliases $2 cardinal aliases arsenic precocious as, $5 cardinal aliases $8 million.

It's conscionable that nan operation of those 15 transactions to 20 transactions typically has gotten america to an mean of astir $150 cardinal right? It's conscionable erstwhile a, erstwhile we do person a twelvemonth of 24 acquisitions pinch a bully fistful of them being, $50 positive cardinal successful revenue, that's what really drives nan number to $640 million.

If you look astatine nan pipeline correct now, I mean, it's still what I would telephone mediate of nan fairway. You know, we're $20 cardinal to $40 cardinal it's considered a ample transaction. And there's a batch of fives and tens successful location arsenic well. There's thing that's, you know, what I would telephone outsized, but we ne'er opportunity average. It's early successful nan year, right? But no, nan mean floor plan of what we're targeting is nary different.

It's conscionable sellers of awesome businesses prime nan clip to waste and it's just, you've seen much group travel to marketplace aliases are yet aft 20 years aliases 30 years of speech determine to say, Hey, it's clip to waste nan transaction. Earlier this year, again, $35 cardinal afloat integrated franchise successful nan westbound seashore again, correct successful nan saccharine spot of that $20 cardinal to $40 million.

Kevin Chiang

Perfect. That's ace helpful. And possibly conscionable a 2nd 1 for me, conscionable a clarification, you talked astir nan imaginable upside pinch nan IRA conscionable confirming it doesn't sound for illustration you're assuming immoderate of that successful your, I conjecture successful 2023 numbers aliases moreover your longer word benignant of return floor plan connected these investments successful R&D. It sounds for illustration that would beryllium upside to nan numbers you provided successful your prepared remarks.

Worthing Jackman

That's right. We've sewage an, again, an finance taxation in installments that we -- that could use to nan works we're bringing online successful nan 2nd half of this year. Mary Anne noted, it could beryllium astir $10 cardinal of rate taxation savings successful nan existent year, and that could beryllium higher than that, but let's hold to spot really this point plays out.

It's astir apt -- it mightiness beryllium nan first ITC that's applied for -- clearly, it's nan first 1 for america to spot really that process moves through. But that's not successful our number. Obviously, that would thief connected nan free rate travel and evidently trim nan nett invested ground successful that plant. And again, pinch regards to eRINs, we person not assumed thing successful our outlook arsenic we hold to get that norm finalized.

Kevin Chiang

Perfect. Congrats connected a very beardown 2022 there.

Worthing Jackman

Thank you.

Operator

Our adjacent mobility will beryllium from Walter Spracklin, RBC.

Walter Spracklin

Thanks for nan sensitivity connected OCC. It's a large situation for analysts that person varying conservatism successful different guidance teams estimates connected immoderate of these things to person that and normalize for it. And is it adjacent to opportunity that though nan -- you said for -- I deliberation it was 10% is $10 cardinal revenue, that's besides EBITDA arsenic well? Presumably, that flows correct to nan bottommost line, is that right?

Mary Anne Whitney

Yes, it's adjacent to opportunity that, arsenic we said successful nan prepared remarks, very precocious travel done connected some OCC and RINs. Yes.

Walter Spracklin

Okay. So that's great. And past connected acquisitions, erstwhile you're buying a batch of companies, it was indicated by 1 of your peers that sometimes they travel pinch immoderate assets that are successful areas that you whitethorn not needfully want to beryllium successful aliases is much difficult to run successful and it's starring to immoderate plus income by 1 of your peers. Is that thing that you're uncovering arsenic well? Would you see benignant of pruning aliases swapping? Would you beryllium buying assets that competitors are trading successful markets wherever possibly they're smaller and your larger and vice versa? Is that thing that you spot a anticipation arsenic doing? Or are astir of your acquisitions successful areas you want to beryllium and benignant of build up successful that area?

Worthing Jackman

Yes. If you deliberation about, again, nan floor plan of nan companies we're buying, typically they're successful a singular market, right? So it's not for illustration they're coming pinch multistate operations and we emotion 2 of nan states, but not a 3rd state, et cetera. So erstwhile you're nan size companies that we're talking astir and profiling, past there's really thing to divest.

I mean, episodically, do they travel pinch -- mightiness they person a bad municipal statement that we request to play retired and reprise and beryllium agnostic whether we support it aliases suffer it? Sure. But it's not a wholesale geographic exit.

Walter Spracklin

Okay. That addresses my questions. Appreciate it. Turn it back.

Operator

Next mobility will beryllium from Noah Kaye, Oppenheimer.

Noah Kaye

Maybe springiness america a image connected nan labour front. When we commencement to thigh these precocious single-digit rates of labour unit flowing done nan P&L, really would that play into nan separator outlook that you've outlined for nan backmost half and immoderate of nan expectations that you outlined for 2024?

Worthing Jackman

Sure. Well, I would say, of course, costs rates enactment successful what I telephone nan mid to precocious azygous digits

from a from an wide unit standpoint, I deliberation wages and costs pressures for nan work system mostly will beryllium much persistent than package engineers and others that you've seen successful nan headlines getting laid off. It's -- obviously, we value supra costs pressures, and you've seen that consistently.

I'd opportunity nan bully news connected labour is that arsenic we move done Q4, turnover improved sequentially arsenic we move done nan twelvemonth and entered this year, our expertise to prosecute has improved month-to-month arsenic we move done nan year, and Q4 was 1 of our highest periods for caller hires.

And I opportunity that because nan 1 unit that's been connected wages during nan past 2 years erstwhile hiring was much difficult was nan standard of nan caller worker coming successful was intersecting location that wrong nan existent costs standard of existing operation, which will put unit connected nan costs for existing employees, that's abated. And truthful now we're looking astatine much emblematic and normalized wages.

Obviously, nan wages we put successful spot for nan twelvemonth are mostly successful place. And truthful we'll unrecorded pinch that this year. But clearly, if ostentation steps down arsenic we move passim nan twelvemonth and get into '24, arsenic turnover continues to amended and retention improve, I surely expect wages -- nan costs unit to beryllium mid to debased azygous digits arsenic we move into '24.

Noah Kaye

That's awesome color. And I'm judge others will inquire astir immoderate circumstantial guidance items, but I conscionable want to ask, what is nan existent sustainability CapEx fund for 2023 since you mentioned immoderate displacement successful nan timing?

Mary Anne Whitney

Right, truthful arsenic we mentioned, a small spot did displacement from '22 to '23, we had primitively been contemplated, nan $150 cardinal would get spent $122 cardinal and $50 cardinal successful '23, and that shifted to much for illustration 75, and 75 aliases a small much than that fixed nan caller project. So 75 -- telephone it, $75 cardinal to $85 cardinal successful 2023.

Noah Kaye

Okay. So really nary -- sorry, spell ahead, Worthing.

Worthing Jackman

So arsenic you spot that play retired pinch a full that we've talked astir for RNG and past you've sewage nan 2 recycling installation plants. I mean that -- arsenic that CapEx benignant of burns disconnected done '25, past you spot nan CapEx arsenic a percent of gross dipped backmost down. That's erstwhile you spot nan conversion of free rate travel to revenue, again, commencement approaching 16.5% again.

And that's when, if you commencement layering connected nan publication of nan renewable substance plants by '26, that further $200 cardinal aliases truthful structurally move nan free rate travel procreation to gross by '26 to astir 17.5% of revenue.

Operator

Next mobility will beryllium from Tyler Brown, Raymond James.

Tyler Brown

Mary Anne, did I perceive you right, but astatine this point, 75% of your pricing is already group for '23. And if that is right, doesn't that consciousness a spot much visible astatine this constituent successful nan year, would that beryllium fair?

Mary Anne Whitney

That is. It's a awesome point, Tyler. So typically coming into nan year, by nan clip we study Q1, we're successful nan position to make a connection for illustration that, that 75% positive is either successful spot aliases is known because it's linked to a CPI adjustment, which has a look-back period. And this year, we're that overmuch further up because of nan quality of nan value increases successful '22.

So if you deliberation astir it, location are a fewer different buckets that lend to nan 75% that's known aliases successful place. One is nan rollover publication from PIs done past year, which, of course, accelerated complete nan people of nan year. And truthful it sets america up for having much rolling over. The adjacent portion is nan CPI-linked contracts, which arsenic we've talked about, measurement up from 5% to 7% successful 2023. So that portion is known.

And past nan last portion is what we've already put successful spot pinch our emblematic early attack to pricing, which was nary different this year. We deed it difficult doing nan immense mostly of our value increases successful January this year. And truthful nan operation of those 3 buckets really is what gets you to astir 75%, arsenic we described it already known aliases successful place.

Tyler Brown

Yes. Perfect. Okay. That's very helpful. And past tin we quickly re-walk nan Q4 margin? I deliberation margins were down 30 ground points. I deliberation you said 150 ground constituent headwind successful commodities. But really overmuch specifically from M&A and possibly immoderate substance impacted margins? Can you conscionable spell those really quick?

Mary Anne Whitney

Sure. So nan pieces are that location was a 60 ground constituent drag, 6-0, from acquisitions, which is why we made nan constituent that it was up 30 ground points year-over-year ex acquisitions. And that was successful nan look of substance was astir a 60 ground constituent headwind and recycled commodities were astir 150 connected their own.

Tyler Brown

And past if I'm not mistaken, do you person a hedge position successful your fuel. How does that play retired for adjacent year? I'm surely assuming that's successful nan guide. But I conscionable want to -- possibly erstwhile we deliberation astir this '23 separator walk, you talked astir nan 100 ground points from commodities, but what astir from fuel? And past specifically arsenic well, what astir from M&A? It conscionable seems for illustration you bought immoderate very bully vertically integrated companies successful '22. So is that possibly not arsenic large of a drag?

Mary Anne Whitney

Yes, sure. The span is simpler this year, Tyler, because of a mates of reasons. So acquisitions successful nan aggregate, looking complete nan afloat year, location really is nary discernible resistance from acquisitions, and that's because, to your point, of nan quality of nan assets we acquired successful '22 and nan attraction to disposal assets.

Now arsenic I look done nan year, there's a small resistance successful Q1 and past that abate, truthful arsenic I said, for nan afloat year, I'd considered astir flat. And substance has a akin move successful that it is simply a headwind successful Q1. It's astir 30 ground points. And past that flips and by twelvemonth -- for nan afloat year, it's really not a headwind astatine all.

And that's because, to your mobility astir hedges, astir 50% of our substance is now hedged. And betwixt nan activity successful what substance prices person done and nan incremental locks we advantageously put successful spot precocious past year, wherever fundamentally -- we fundamentally derisk that. So astatine existent levels, there's nary effect from fuel.

Tyler Brown

Okay. Perfect. And past I had a mates of questions. So I conscionable want to benignant of spell complete nan free rate travel guideline and make judge I've sewage it each consecutive successful my head. So past quarter, I deliberation you said location was a statement of show to double-digit free rate travel growth. I'm going to opportunity that was disconnected of your 1 spot not 16 guidance, which would person put you a telephone it conscionable nether $1.3 billion, assuming, telephone it, low, debased double-digit growth.

But it sounds for illustration there's astir $50 cardinal much successful CapEx than was anticipated. So if I benignant of return that off, that's what benignant of gets maine backmost to wherever nan guide. Is that nan correct measurement to benignant of quadrate each that?

Mary Anne Whitney

Yes, I would work together pinch that. The number I would usage is simply a 10% summation disconnected of what we expected to present earlier we over-delivered successful '22 was $127.5 million. You backmost disconnected $50 million, you're astatine nan $122.5 guideline that we provided.

Tyler Brown

Yes, perfect. And past conscionable my past 1 existent quick. Worthing, you talked a small spot astir this, but holistically, what is benignant of nan portion costs ostentation presumption successful '23, including labour and subcontractor and everything benignant of each in?

Worthing Jackman

Yes, we're assuming a scope betwixt astir 6% and 7% each in.

Operator

Next mobility will beryllium from Michael Hoffman of Stifel.

Michael Hoffman

The free rate -- I'm going to inquire free rate travel a different way. How should I deliberation astir 2 aliases 3 twelvemonth free rate travel maturation stack fixed there's tons of things successful immoderate fixed play these days? So what's nan connection astir nan maturation stack, if you will, connected free cash?

Worthing Jackman

Sure. I mean you look astatine -- first off, connected nan CapEx side, again, you've sewage almost 100 ground points of gross aliases 1% of gross from sustainability projects successful nan existent twelvemonth and adjacent year.

Again, I'm rounding. As you -- it starts to mean arsenic you get into '25. And truthful erstwhile we're done that, that puts this year, we're guiding what astir 15.5% aliases much arsenic a percent of revenue, that puts america backmost to that 16.5% scope arsenic a percent of revenue, and it puts it backmost supra comfortably supra nan EBITDA, complete 50% of EBITDA.

But again, arsenic nan RNG starts kicking in, arsenic we're getting, arsenic we said before, astir $200 cardinal of incremental EBITDA by 2026, nan taxation effect that that's putting different 1.4%, 1.5% by past rate travel procreation arsenic a percent of revenue. And again, that's why I said, arsenic we get into '26, we ought to beryllium stacking up to astir 17.5% aliases approaching 55% aliases truthful of EBITDA.

Michael Hoffman

Okay. And that's nan important constituent is you've been surviving successful a 50 to 55, person to nan debased end, you're moving backmost towards nan $55 million?

Worthing Jackman

Right. Because what puts america to nan person to $50 cardinal here, obviously, is nan further sustainability CapEx, right, arsenic good arsenic higher liking rates, higher rate taxes, et cetera. But successful October, we knew wherever liking rates were going, and we knew what rate taxes were going successful to Mary Anne's point, that's -- this isn't -- we don't spot present coming amazed by nan year-over-year changes.

Yes, rate taxes are up $100 million. We knew that. We cognize rate liking is up. It's much truthful for america for acquisition outlays. It's conscionable that, arsenic you know, nan full indebtedness outstanding grew by astir $1.8 cardinal year-over-year. And you put immoderate benignant of floating complaint of 5%, 5.5% connected that, I'm not amazed that rate liking is up $65 cardinal aliases thing year-over-year.

And truthful it's -- anyway, that's not a surprise. It's conscionable nan 50 portion -- nan $50 cardinal successful fleet. As we move done nan past 4 months, I mean nan numbers of delays went from little than 50 and possibly we'll still get them to 125 to 170 to 200 to 205 units arsenic you exited nan year. We're sitting present waiting for a fleet we ordered 2 years agone that still hasn't been delivered, right? The '22 CapEx was ordered successful early '21.

And truthful it's that uncertainty. The bully news is we held it to $50 cardinal because we were capable to salary for nan chassis. And it's really conscionable nan bodies connected 200-plus units that nan costs of that, that shifted into this year.

Michael Hoffman

Okay. And past tin you stock pinch america arsenic prize depreciation unwinds, what's nan full dollar magnitude that is going to locomotion backmost through?

Worthing Jackman

Yes. I mean it's obviously, successful this CapEx outlay, it's reliable to -- connected a dollar basis, it's going to emerge. But because what happens is there's definite limitations of really overmuch prize appreciation we use successful immoderate 1 year.

Our rate taxes this twelvemonth ought to beryllium 65% to 70% of nan GAAP accrual because of nan magnitude of prize depreciation carryover that we didn't usage successful anterior years, right? And truthful it's not arsenic a nonstop measurement down that different companies mightiness person been talking astir because we person a small different book here.

Michael Hoffman

Okay. And past if I could displacement gears to nan RNG. If I see Louisiana, positive nan 4 that are being developed, really galore MMBtu will you ain erstwhile you're done successful that $200 cardinal of EBITDA?

Worthing Jackman

I don't person that number. That sounds much for illustration an engineering question. But look, I deliberation much astir gross and if we are -- if we did, what, astir $100 cardinal aliases truthful of landfill state and RINs gross past year, and we stepped that up to $300 cardinal aliases truthful by '26, we're going -- and by nan end, nan company, obviously, will beryllium bigger than nan $8 cardinal we're guiding to now. And truthful overall, connected a gross basis, RINs could go successful landfill state could get to that 3% aliases truthful of gross from nan one, 1.5 percent correct now.

Michael Hoffman

Okay. Sliced a different way, is your guidelines presumption astatine $2 RIN and astatine $2.50 state to get to that gross number?

Worthing Jackman

Right.

Michael Hoffman

Okay. Everybody wants to inquire astir volume, and I've ever heard you opportunity you'll waste and acquisition

volume for value each time long. But different measurement to talk astir measurement is work intervals, benignant of what's nan underlying inclination successful nan mini instrumentality business. How would you framework that?

Because I deliberation that's the...

Worthing Jackman

I mean, arsenic I look astatine conscionable nan past six months of past twelvemonth to spot that nett caller business remained affirmative done nan twelvemonth connected a month-to-month basis. And truthful obviously, increases successful caller business are much than offsetting nonaccomplishment successful immoderate decreases.

Michael Hoffman

Okay. And past you ever person a building for each year. So tin you stock pinch america what maturation of gratitude is what's nan message?

Worthing Jackman

Sure. Obviously, past twelvemonth was intentional, and we talked a batch astir what intentional meant to america done nan years. Look, and I won't walk overmuch clip connected this, but to me, maturation is not astir apical statement maturation and maturation successful nan business, it's much astir nan individual and master improvement and maturation of our leaders, right? I mean our leaders person spent exhausting magnitude of effort looking aft their group done a very challenging time, pandemic, health, use issues, et cetera.

And truthful our leaders conscionable request to retrieve to put successful themselves and their ain individual growth. And obviously, we will further that based connected nan magnitude of discretionary to beryllium -- I don't position nan training is nan discretionary, but we put a batch of effort and a batch of dollars into training and development. And truthful arsenic a reminder of our leaders to return attraction of themselves, don't hide to return attraction of themselves and turn personally while they look aft others arsenic serving leaders.

And obviously, gratitude is shifting nan DNA of immoderate servant leader successful recognizing and appreciating their labor and each nan bully benefits that travel from that. And truthful it conscionable -- it's a chance to bespeak connected individuals and really grateful we each are to beryllium portion of this statement and support that beforehand and centre arsenic we move forward.

Operator

Next mobility will beryllium from Chris Murray, ATB Capital Markets.

Chris Murray

Maybe turning backmost to nan CapEx mobility a small bit. I guess, a mates of parts to this. First, if you look astatine this is nan CapEx arsenic a percent of revenue, it's going to beryllium a small spot higher this twelvemonth with, I guess, nan catch-ups. I conjecture a mates of things to deliberation about. One, arsenic we move into benignant of later years and retired of '22 and things commencement to normalize, is location immoderate logic to judge nan CapEx doesn't measurement backmost to benignant of humanities levels benignant of astir 10% of revenue?

And past second, conscionable looking astatine nan costs line. You've benignant of mentioned labour and substance a small bit, but does getting these further vehicles aliases possibly immoderate different things, is location thing that you tin talk astir successful position of costs reductions aliases costs betterment successful nan separator that look to possibly make margins complete and supra what you tin conscionable reprise?

Worthing Jackman

Yes, I'll return a portion of it. I mean, from a from really we tally nan business standpoint, there's not immoderate awesome finance that's going to recklessly return retired 7,000 heads and alteration nan labour floor plan of this business. I mean are we -- do we automate and push nan section communities to automate? Is that their decision? Yes.

And truthful successful immoderate cases, it's a very agelong dialogue, but we person a mates of markets that we'll beryllium automating that will thief connected nan labour side. Obviously, I deliberation we've conscionable celebrated our 50th robot to spell into our recycling facilities. And obviously, each 1 theoretically should return up. If you double shifted 3 to 4 headcount successful each per robot deployed.

I'll beryllium funny to spot if looking astatine headcount, if that's really happened aliases not. But obviously, we person gotten nan use of overmuch higher value of merchandise connected nan outbound and nan pricing we're getting supra nan precocious expanse -- precocious connected nan sheets has been a immense use for america and nan expertise to move our merchandise fixed nan value of nan product. So they're not conscionable labour benefits sometimes aliases different benefits arsenic well.

And truthful we're perpetually looking astir nan edges connected that, obviously, pinch regards to AI and usage of exertion to -- we're not utilizing that to effort to switch heads pinch regards to customer service. We're trying to make it nan customer work acquisition improved and nan pressures of responding to inbounds lighten up a small spot to amended retention astir that, not to switch people, right? And truthful anyway, conscionable our attack is and really we connection is simply a small spot different. But suffice to say, there's a batch that goes connected down nan scenes astir this.

Mary Anne Whitney

And Chris, pinch respect to CapEx arsenic a percent of revenue, you're right, to your study that we person been successful this play wherever arsenic we've described, whether it's sustainability-related investments, whether it's opportunistically making outlays for existent property arsenic we look guardant for early maturation for various reasons. You've seen that moving higher. And I deliberation it's a reminder of why value has been truthful important arsenic we punctual people, there's inflation, not conscionable successful nan P&L, but besides connected nan CapEx side, you look astatine what nan costs of building projects has done.

And really, we're gladsome we've had nan attraction connected value arsenic we had. But each that being said, we do look guardant arsenic we move done this play to getting backmost to a much normalized rate, and I'd promote you to deliberation of that arsenic much arsenic 10.5% to 11% is really to deliberation astir benignant of nan guidelines CapEx for a debased magnitude of measurement maturation successful benignant of a emblematic year.

Operator

The adjacent mobility will beryllium from Stephanie Moore of Jefferies.

Stephanie Benjamin Moore

I benignant of wanted to put together, I think, a batch of nan questions that person already been asked, but possibly asked a different measurement I recognize you're not accounting for overmuch betterment successful inflationary expectations. But I'm trying to deliberation astir it, if that's nan lawsuit successful inflationary pressures do enactment elevated, does that mean you could spot immoderate upside moreover connected nan pricing side? I recognize that your -- there's beautiful bully visibility, 75% you called out, but is location still an opportunity for a spot much upside if ostentation stays elevated?

But past connected nan different side, if it does benignant of abate from here, past intelligibly would expect there'd beryllium upside from nan separator beforehand arsenic that improves? Or is location a anticipation to spot a small spot of both? Just trying to benignant of put each nan pieces together.

Worthing Jackman

Sure. Good question. No, we've implemented pricing assuming it stays elevated. And truthful it's not for illustration staying elevated longer. It's going to beryllium a astonishment that we request to spell backmost successful again. we've anticipated that. So to nan grade that it does commencement abating arsenic we noted, that is upside because pricing is done. And truthful no, that's -- we position that arsenic much upside than trying to pursuit ostentation for illustration we've had to do these past 2 years, right?

And truthful our folks are up of it. We person not -- batch of economists deliberation ostentation is going to beryllium crossing 3%, 3.5% by nan extremity of this year. We didn't value assuming nan downward slope that astir economists person from January to December because if you do that and they're wrong, and which they've been beautiful consistently wrong, past we've mispriced our business, right? And truthful we've assumed elevated for longer. And to nan grade it does abate, we'll get nan upside from that.

Operator

Next mobility will beryllium from Kyle White, Deutsche Bank.

Kyle White

I cognize a batch has been talked astir M&A, but I'm conscionable curious, conscionable fixed nan truth that you spent rather a spot connected acquisitions this past year, do you person nan appetite and soul firepower to complete different outsized twelvemonth of acquisition successful 2023? Or should we expect it to beryllium comparatively subdued arsenic you activity to merge immoderate of those deals past year?

Worthing Jackman

Good question. Remember, aft our dividend, we still person almost $1 cardinal of free rate travel to money M&A. And truthful we're not constrained from a equilibrium expanse standpoint to do different outsized year. I mean if we conscionable -- if an mean twelvemonth is $150 cardinal and, let's say, we do $150 cardinal to $200 cardinal of acquired gross this year, that's astir apt america spending astir $0.5 billion.

And truthful we still person different $0.5 cardinal near complete for thing that mightiness travel on to put that number supra 200 aliases to use for different purposes. And truthful I deliberation we're blessed to person nan elasticity fixed nan spot of nan business and nan rate travel procreation and nan increasing denominator successful EBITDA, that besides brings leverage down to stay elastic for immoderate opportunities that come.

Mary Anne Whitney

And to that constituent astir equilibrium expanse flexibility, we ended nan twelvemonth astatine a small complete 2.9x debt-to-EBITDA. And if we're benignant of successful a normalized environment, we conscionable do an mean magnitude of twelvemonth deals, past we'd expect that leverage to conscionable dynamically delever, travel down to astir 2.5x complete nan people of nan year.

Kyle White

Got it. That makes sense. And past connected pricing, conscionable what's been nan reception, nan customer reception to benignant of nan pricing situation much precocious aliases compared to pre-pandemic levels? And past connected that, it seems for illustration nan manufacture has been very disciplined connected pricing beforehand since nan pandemic and complete nan past fewer years. Do you spot immoderate signs that this subject will transportation guardant possibly specified that you could spot a measurement alteration successful pricing behaviour for nan amended complete nan longer term? Or do you conscionable position this each arsenic a byproduct of nan inflationary situation we're in?

Worthing Jackman

I deliberation it's a byproduct of an inflationary environment. It's a byproduct of benignant of immoderate of nan companies that unrecorded connected little margin, having overmuch much unit connected wages fixed nan costs floor plan that they had going into nan pandemic to support that benignant of debased pricing. Obviously, CapEx dollars are up. And truthful nan pricing umbrella is location because of costs pressures, because of declining commodity values, costs pressures, et cetera.

To nan grade that inflationary -- ostentation does spell down to 2%, 2.5%, 3% adjacent year. I surely expect that pricing should measurement down pinch it, right? I mean it's -- conscionable because you tin do 10% value doesn't mean you should beryllium doing it successful a 3% environment, right? And truthful I surely expect that arsenic we deliberation astir a longer-term dispersed to ostentation arsenic ostentation comes down, we'll support our dispersed and transcend that, but we'll measurement down arsenic ostentation steps down, too.

Operator

Next mobility will beryllium from Stephanie Yee, JPMorgan.

Stephanie Yee

I wanted to inquire astatine what constituent would you see stock repurchases arsenic portion of your superior allocation possibly this year?

Worthing Jackman

Sure. Well, arsenic you know, past year, we spent, what, astir $425 cardinal connected stock repurchases. And truthful we're opportunistic. And truthful it's -- we support authorization to repurchase up to 5% of our shares annually. And to nan grade we dip our toed successful nan marketplace again, it remains to beryllium seen. But look, acquisitions are ever a higher and champion usage of our excess capital. And truthful it's first and foremost, nonstop it that way.

Mary Anne Whitney

And of course, successful an situation for illustration this, Stephanie, wherever incremental borrowing costs are complete 5.5%, past indebtedness repayment is different avenue that we'll consider.

Stephanie Yee

Okay. That makes sense. And tin you conscionable make a remark connected your customer retention rates overall?

Worthing Jackman

Yes, retention is rather high. I mean I deliberation nan different companies person talked astir it arsenic well. The reality is erstwhile we talk astir labour constraints, it's crossed nan industry. So it's nan expertise for competitors to poach is arsenic constrained by their deficiency of excess capacity arsenic others. I'd opportunity that work successful this situation matters a awesome deal. You can't put a value connected nan thoroughfare and not work your customers, right? And truthful retention has been rather high, I'd opportunity all-time high. I'd opportunity retention connected pricing moreover astatine these levels is astatine its highest level arsenic well. And truthful again, that conscionable shows you nan wide constraints that everyone is operating nether not conscionable 1 institution aliases another.

Operator

[Operator Instructions] Next mobility will beryllium from Sean Eastman, KeyBanc Capital Markets.

Q -Unidentified Analyst

This is Nick connected for Sean today. I conscionable wanted to travel backmost to sustainability. A batch of your competitors are talking astir benignant of expanding request for integrative circularity. Is that accordant pinch possibly what you're seeing successful nan marketplace? And if so, would that beryllium thing you'd see exploring further down nan line?

Worthing Jackman

I deliberation our position correct now is we're happy to beryllium a supplier of recovered plastics to immoderate of these investments aliases others that are chasing this.

Operator

This concludes our question-and-answer session. I'd for illustration to move nan telephone backmost complete to Mr. Worthing Jackman for closing remarks. Please spell ahead.

Worthing Jackman

Terrific, Nick, and acknowledgment for being location for america today. If location are nary further questions, connected behalf of our full guidance team, we admit your listening to and liking successful nan telephone today. Mary Anne and Joe Box are disposable coming to reply immoderate nonstop questions that we did not screen that we're allowed to reply connected nan Reg FD, Reg G and applicable securities laws successful Canada.

Thank you again. We look guardant to seeing you astatine upcoming investor conferences aliases connected our

next net call. Thank you.

Operator

Conference has now concluded. Thank you for attending today's presentation. You whitethorn now disconnect.

Editor: Naga



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