Greetings, and welcome to the Waste Connections First Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, on Thursday, April 29, 2021. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

Perfect. Thank you, operator, and good morning. I’d like to welcome everyone to this conference call to discuss our first quarter 2021 results and provide a detailed outlook for the second quarter. I’m joined this morning by Mary Anne Whitney, our CFO. As noted in our earnings release, strong solid waste pricing growth, accelerating solid waste volumes and increased resource recovery values drove better-than-expected first quarter results and an improving outlook for 2021. These tailwinds bolstered by strong solid waste pricing retention, drove adjusted EBITDA margin in Q1, up 70 basis points higher-than-expected and up 80 basis points year-over-year. As Mary Anne will discuss shortly, a 210 basis points year-over-year solid waste margin improvement in Q1, more than offset drags primarily from lower E&P waste activity and stock market-related deferred comp margin swings. Adjusted free cash flow was $290 million in the period, positioning us to comfortably exceed our minimum outlook of $950 million for the full year. Solid waste activity accelerated as we exited the first quarter, with volumes up 2.6% year-over-year in March in spite of a tough COVID-19 comp, positioning us for double-digit solid waste price plus volume growth in the second quarter. Recovered commodity values also continued to improve. We knew that our differentiated response to the COVID-19 pandemic will leave us well-positioned as local economies reopen, we are encouraged by the improving macro trends and our strong operating and financial performance as we anniversary the onset of the pandemic. COVID-19-related impacts to our business continue to abate, but most importantly, our commitment to and support of our employees and their families are unwavering. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Thank you, Worthing, 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 disclosed both in the cautionary statement included in our April 28 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today’s date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Worthing.

Thank you, Mary Anne. In the first quarter, solid waste pricing and volume growth both exceeded our expectations, collectively up 100 basis points in the period in spite of the tough year-over-year comparisons from the strong start to 2020 that persisted up until the mid-March of last year when the onset of the pandemic began to impact our results. Core price in Q1 of 4.5%, plus about 30 basis points in fuel and material surcharges was above our outlook. Q1 pricing ranged from 2.7% in our mostly exclusive western region to a range of 4% to 5.5% in our more competitive regions. Our pricing strength continues to reflect the differentiation of our market model and the consistency of our focus on execution and quality of revenue, both as volumes declined during the pandemic and as volumes have recovered. Pricing growth is expected to increase sequentially to above 4.5% in Q2. Reported volume growth in Q1 was 80 basis points better-than-expected at negative 3.2% due to the faster-than-expected recovery in activity as local economies reopened. As expected, February volumes were impacted by the severe winter weather affecting operations in many markets, most notably in our southern region. Adjusting for the weather-related impacts and normalizing for the extra leap year day in 2020, Q1 volumes improved sequentially by an estimated 110 basis points from Q4 and accelerated into quarter end. Volumes continue to be strongest in our western region, which was up 3.8% year-over-year in Q1, similar to Q4, while sequential volume improvements were driven mostly in our central and eastern regions on improving trends during the quarter. Solid waste volume growth turned positive in March, up 2.6% while inflecting landfill volumes, roll off activity and commercial revenue and is expected to exceed 5% in Q2. Looking at year-over-year results in the…

Thank you, Worthing. In the first quarter, revenue was $1.396 billion, about $26 million above our outlook due primarily to higher-than-expected solid waste growth and recovered commodity values. Revenue on a reported basis was up $44 million or 3.2% year-over-year in spite of E&P waste activity down almost $35 million. Acquisitions completed since the year ago period contributed about $43.7 million of revenue in the quarter or about $40.5 million net of divestitures. Adjusted EBITDA for Q1, as reconciled in our earnings release was $433.2 million, about $18 million and 70 basis points above our outlook at 31% of revenue, up 80 basis points year-over-year. Underlying solid waste collection, transfer and disposal margin expanded by 110 basis points with, as Worthing noted, another 110 basis points benefit from recovered commodities. This combined 210 basis points margin expansion more than offset an 80 basis points drag from lower E&P waste activity, a 40 basis points impact from stock market-related deferred comp margin swings when comparing stock market performance in the two year-over-year periods and a 10 basis points margin dilutive impact from acquisitions completed since the year ago period. We delivered adjusted free cash flow of approximately $290 million or 20.8% in Q1, while maintaining the outsized working capital cushion we had established as we exited 2020. As such, we are positioned to comfortably exceed our minimum full year adjusted free cash flow outlook of $950 million we communicated in February. I will now review our outlook for the second quarter of 2021. 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 approximately $1.49 billion. We expect solid waste price plus volume growth of approximately 10% in Q2, with volume growth of over 5%, reflecting the acceleration activity that started in late Q1 and is continuing in April. Recovered commodity values and E&P waste revenue are expected to remain in line with current levels. Adjusted EBITDA in Q2 is estimated to be approximately $468 million or 31.4% of revenue, up 120 basis points year-over-year. Depreciation and amortization expense for the second quarter is estimated at about 13.5% of revenue, including amortization of intangibles of about $32.6 million or $0.09 per diluted share net of taxes. Interest expense net of interest income is estimated at approximately $42 million. And finally, our effective tax rate in Q2 is estimated to be about 21.5%, subject to some variability. And now let me turn the call back over to Worthing for some final remarks before Q&A.

Thank you, Mary Anne. We’re extremely pleased with our start to the year. Strong solid waste pricing growth, accelerating solid waste volumes, increased resource recovery values drove better-than-expected first quarter results and an improving outlook for 2021. We are well-positioned to benefit from supportive factors in the macro environment, including stronger-than-expected pricing growth and price retention given inflation levels, further improvement in recovered commodity values, increases in housing and infrastructure-related activity, less volume growth from the ongoing reopening of COVID-19 impacted markets. We are already seeing these benefits in the increased activity that began broadly in March, and we anticipate communicating an increase to our full year outlook when we announced Q2 results. Before heading into Q&A, we’d like to recognize and thank Don Slager for his over 40 years of commitment and leadership in this industry. And with that, we appreciate your time today. And I’ll now turn this call over to the operator to open the lines up for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from Walter Spracklin with RBC Capital Markets. Please proceed.

Yes. Thanks very much, and thanks for taking my question. Good morning, everyone.

Hey, good morning.

Good morning.

So speaking to the quarter trends, I know you mentioned above 5% for Q2. When you look at your sequential here in the weeks to start the quarter, how would that volume growth of exceeding 5% compared to the quarter-to-date trends that you’re seeing right now?

Walter, I’d say that what we’re describing for Q2 is pretty much in line with what we’re seeing, the continued improvement we’re seeing in April. And what I’d say there is, if we look at the trends in March and really, last year, the comps really not easing until late March, right. What we saw is 2.6% volume in March, and you go from there and you say a full year quarter increase would be over 5% just based on those trends. And so I’d say we’re continuing to see the trends improve. April stat include seeing trends where volumes or landfill pulls – landfill volumes and roll-off pulls, which were up mid-single digits in the month of March, we’re seeing up mid-double digits in the month of April, again, in line with how we would think about the whole quarter.

Yes, we’re back – Walter, we’re back to at landfill volumes above pre-COVID levels. And we start seeing mid-teens and high-teens increases in a month year-over-year, you see the kind of the step back as economies reopened.

Okay. That’s very encouraging. And I find it, so when I look at your outlook and your decision not to increase guidance here. I know certainly you only said it a couple of months ago. But given how encouraging it looks and your language around potentially doing that next quarter. My question is what’s causing you to wait? Is it the geographies you serve? I know Canada, sitting here in Toronto, we’re still in a pretty heavy lockdown. Is that what’s keeping you back in terms of increasing your guidance? Or is there any other factors at play here?

No. Look, we don’t believe in changing our guidance every other month. I mean, it’s better to see the trends play out in July. You’ll see more of the economies reopen. Let’s not get into a quarter to quarter to quarter type of changing our guidance. But clearly, if you look back at where we guided the year, we guided the year up 50 basis points overall, the margins, here we are out of the gate, up 80 basis points just in Q1 and guiding 120 basis points in Q2. So put simply, the 50 basis points of the full year is already in the bag through midyear. And so as margins increase in the second half, year-over-year, that will be additive to the way we guided margins for the full year. And obviously, with half the year done and us got in Q3 – on our Q2 call, you’ll have plenty enough visibility into revenue. So we don’t have to kind of guess and game around revenue.

Yes, that makes sense. And so just to confirm, there’s no regional disparity that’s causing you to – that’s being a drag on your results here or causing you any undue concern.

Nothing at all is, I think, as you can tell by the tone in the release and the tone on the call. If you step back, even the way we guided Q2, we’re back above where we were last unaffected – COVID unaffected quarter was Q2 of 2019, we looking at second quarter comparisons. And adjusted for acquisitions, we’re back on a total revenue basis above where we were in Q2 of 2019, but with higher margins and that much more cash flow than was generated before. And so the business is, as we said before, kind of a totally different business, more profitable and higher cash flows as we exit the pandemic and you’re seeing in the Q2 guide.

That’s great to hear. Appreciate the time.

Just one other point to elaborate on in terms of the regional differences. I’d just make the point that if I look at the month of March, at all regions improved and everyone, but for our eastern region, actually turned positive and eastern was only down nominally, and that all regions were projecting to continue that sequential improvement Q1 to Q2.

And we’re not going to make a guess here about whether or not COVID-related revenue that has not yet returned – ever returns. Obviously, as New York City and some of the major metro areas in Canada, get further into their reopening or eventually get back to reopening again, you’ll see that be incremental to us. And again, that’s why I think in July, we’re in a much better position to know how that’s come back. What the trends look like for Q2.

Great. Appreciate the added color. Thank you.

Our next question comes from Kevin Chiang with CIBC. Please proceed.

Thanks for taking my question, and congrats on a good quarter here. Maybe if I could turn to your M&A comment Worthing and Mary Anne. It sounds like another outsized year. And I’m just wondering, incrementally, just given all the tax noise in the United States and the potential increase in the corporate tax rate specifically just given your tax structure and you’ve being domiciled in Canada, does that – do you think that gives you an incremental advantage on M&A versus maybe some of your U.S. peers who might bear the full burden of that potential tax increase?

It’s not something that gets factored into valuation, if that’s your question. I mean, look, the clearly, if you’re a private owner and you’re looking to get ahead of what could become a mid to high-50%s capital gains rate in some states, you’re looking to get transactions done prior to year-end. And so with valuations at attractive levels, with kind of the Tax Act, so to speak, hanging over, there’s a lot of dialogue and activity and it pushed prior to year-end. And obviously, the one thing that folks also get concerned about is areas where you’ve got market overlaps. And obviously, you’ve seen some companies take over a year to get through the DOJ. And so for – especially for transactions where we have no market overlap, there’s a lot higher confidence level and not having that process impede the ability to get it done prior to year-end. So there are a lot of things at play. But our structure does not come into play as we think about acquisitions.

Okay. That’s helpful. And then you made a comment as well, just on not trying to guess which small businesses come back and who ends up ultimately surviving this unprecedented, I guess, environment we find ourselves in. But you’ve obviously seen a pretty strong reopening here, especially in the U.S. Just wondering, as you think about the provisions you’ve taken for credit losses, how is that thing playing out versus maybe what you would have assumed, let’s say, nine months ago in terms of how these small businesses are coming back, especially as government support measures are removed? Or is it the project to the upside? It feels like it might be when I look at maybe the credit provision – the credit loss allowances you took in the first quarter here?

Well, yes, I think the credit losses were a lot less than feared as the pandemic started because we were very proactive in ensuring that we weren’t billing revenue that may not be collected. And so we haven’t really seen anywhere near the magnitude of what credit losses could have been because of the way we’ve tightly managed what kind of revenues we are recording in invoicing.

Okay. That’s helpful. And maybe just a housekeeping question. I saw a nice sequential improvement in Canadian core price. Just wondering, is that just the timing of when price increases will push through? Or is there anything else you would point to there?

No. We would say that Canada, as with all of our regions, have seen very strong pricing retention and really has exceeded our expectations. And we’re certainly mindful of the lockdown in Canada, but our business has performed remarkably well in spite of that. And really no change in how we think about pricing. But again, Canada, like all of our other regions delivered a little more price than we would have anticipated.

Great. Thank you for taking my questions.

Our next question comes from Jeff Goldstein with Morgan Stanley. Please proceed.

Hey, good morning. Thanks for taking my questions. I was hoping for an update on the environment in some of your more competitive markets. Just given all the dynamics around COVID and the recovery beginning now, are you starting to see any less discipline in the market when it comes to contract bids? Doesn’t appear so based on your results so far, but just anything notable to call out on the competitive landscape?

Sure. Really, as we’ve said for the past few quarters, we’ve been impressed by how rational pricing has continued to be in spite of the pandemic, and I would say in fact, on some residential bids, I think people have seen the opportunity to push pricing higher and are disciplined. And so there are – you’re seeing, again, rational behavior there. You always have your isolated incidents where there can be markets where it’s less so, but I think if you just look at the price that we reported in Q1 and the fact that retention is higher, it’s an indication of how rational the markets are.

Okay, that makes sense. And then I’m curious if you’re seeing any changes to the labor force in terms of retention, given last year at this time, the labor market was pretty soft, but it really kept improving ever since then. So have you seen anything meaningful that’s worth calling out? Or just anything at all notable to mention around the labor force right now?

Well, I’d say, first and foremost, you want to keep who you have, right. And to that end, turnover improved again sequentially, Q4 into Q1. That said, look, as we talk about this growth environment, you put that growth environment on top of increased seasonal needs for labor in certain markets for yard waste and a typical increase in summer activity, we are actively hiring, right. We hired more people in the month of March than we had since the month and any month since September of 2019. And again, it’s is being cognizant of – as growth is occurring, cognizant of hours of service and make sure you’re managing that and maintaining work-life balance for our folks. Again, it’s the increased roll-off activity. That’s something whereas demand continues to increase. You’re putting more trucks and more people and trucks to cover it. So no, it’s – look, labor is always an issue, labor availability, it’s going to get more acute. I think waste management mentioned the same thing. But the important thing is for our companies and others, is to stay proactive and ahead of that curve. And it’s – as you know, it’s not just about what you pay because we were very proactive last year in raising minimum wages, targeting wage just to $15 an hour and other ancillary benefits and other things that make that economic package attractive. But it’s also the culture of the company and most importantly, leadership. And so we want to make sure it’s a great place for folks to work and pick us over other alternatives they might have.

All right. Appreciate the color.

Our next question comes from Chris Murray with ATB Capital Markets. Please proceed.

Thanks, folks. Good morning. Maybe turning back to your free cash flow commentary. In the quarter, the conversion rate was pretty high, north of 20%. And I know we’ve had this inspection in the past. I think, Worthing, you’ve sort of cautioned when we have these quarters to maybe not get ahead of ourselves. But I’m just starting to think about the inputs and whether or not the quality of your revenue has changed in any way over the last year. And as we get reopening and maybe pick up some tailwinds from E&P and recycling, whether or not we should be thinking what used to be maybe 17% to 18% conversion is going to be a bit higher?

Well, I’ll start and then it’s Worthing. To your observation or acknowledgment, Chris, that any individual quarter isn’t necessarily indicative of the whole year, your reminder of the timing of interest and tax payments and why Q1 is always a very strong quarter. That being said, we did emphasize that working capital cushion that we had talked about being outsized at year-end really didn’t dissipate and didn’t abate in Q1. And so what that suggests is the strength of the underlying free cash flow. And to Worthing’s point about when we think about the full year and our ability to attain the level that we talked about in February, we feel very comfortable talking about that.

And again, as you know, we talk about conversion percentages of EBITDA. For us to be converting north of 52%, 54% or so of EBITDA to free cash flow, that is a quality that no other company can attain or has attained. But to your point about is there a different quality of revenue coming out of pandemic, as I noted earlier, again, ex acquisitions, we’re, again, back up at or above where we were in Q2 of 2019 with higher margins and higher free cash flow generations, which shows you, there’s been a little improvement in the quality of revenue and the profitability and cash flow flowing from that as we come out of pandemic.

Okay, that’s helpful. And then one other question for you. I know both in Canada and the U.S., there’s been some discussion about maybe going back and looking at greenhouse gas emissions. And I know that’s been changing back and forth with regulation. But how would you characterize your thoughts around landfill gas emissions and your approach to thinking about what you’re doing today and what you might have to do in the future, just to address any changes in regulation or any tightening of it?

We’d start by saying, of course, this is a highly regulated industry, and typically incremental regulation benefits well-capitalized companies. And we do a lot of things to make sure that we’re performing at or above the standards that are out there. And as you know, we see it as an opportunity to continue utilizing the gas that’s generated at our landfills and capturing that, monetizing it. And as we’ve all discussed in this environment, it’s an ideal time to be doing that. But frankly, we’ve all been doing that, and it’s part of how we run our business. And to the extent we can do more landfill gas projects, the high-Btu gas projects, that’s just an incremental opportunity.

And look, I think us and other companies, look, we all try to reduce fugitive emissions coming off the site that won’t be captured. And to that end, we increased use of synthetic – temporary synthetic gas to again reduce the migration of gas out of the landfill other than what’s being captured. And so – and again, as folks may have read in our ESG report that we put out last year, reducing emissions and kind of the release from the landfills is a key priority of ours.

All right, folks. Thanks for the time.

Our next question comes from Tyler Brown with Raymond James. Please proceed.

Hey, good morning.

Hey Tyler.

Hey, Worthing. So I think both Waste and now you have talked about maybe slightly better pricing out of the gate. I think you mentioned it was retention. I thought you tended to allocate churn toward volume and not price. But I don’t really want to go down that rabbit hole here. But what lies in – or what lines or types of markets are you starting to see this in? Because I don’t think it’s CPI. That’s actually probably a slight negative. So is it really the competitive side? And just any thoughts on the types of lines that you’re seeing in that step up?

Right. It’s – obviously, therefore, it is a competitive markets. Look, it’s not unusual for – if a location may believe they’re going to price or deliver 4% price to put 4.4% price as so on the street and expect some sort of rollbacks on the implementation for a piece of that price increase. And again, as we said before, price retention is at its high is because we’re not seeing the amount of rollbacks we’ve typically seen. And so that’s not a churn issue. That’s just a retention of price being stronger than in prior periods.

Yes. So right. That’s a good clarification. So retention is more on rollbacks, churn is completely different. So that’s helpful. Okay. So Mary Anne, you obviously do a great job on bridging the margins. I love it. It’s very helpful. So how do we think about the commodity benefits for the rest of the year? So I think you got 100 basis points here in Q1, but if you were to baseline prices today, what would that be in Q2, Q3 and Q4? Because if I’m not mistaken, OCC prices were a little bit wacky last year, I think they actually stepped in Q2, came down in the back half.

That’s exactly right, Tyler. And that’s a great observation. That will impact the behavior quarter-over-quarter or year-over-year in each quarter. And to your point, if I look at OCC, just starting there, it’s the toughest comp in Q2. It’s actually twice as high, Q1 to Q2 last year, went from around $55 a ton to up to $110 a ton. So toughest comp in Q2 and then steps down over the course of the back half of the year. RINs not quite as volatile, so that will smooth it a little bit. But if I look just at Q2 and where we are, even though recycled commodities and RINs have stepped up some Q1 to Q2, I think the impact would be similar in Q2 as it was in Q1.

Okay. So 100 basis points in Q2 is embedded in there. And then any thoughts about the back half just based on the current baseline?

So it drops – as you’ll recall, we guided to 60 basis point benefit, starting with 80 in Q1. And so what this suggests is at the current baseline, it’s a little better than that, but it drops off over the course of the year.

Okay. Okay. That’s helpful. And then not to nitpick, but did the leap year, last year, so was that actually a margin help this quarter? Was that like a 50 basis point help to solid waste margins?

Yes, I think it was 30 to 40, and that was incorporated in our guide, right? Because I think we all knew the leap year comparison was there when we guided in February.

Right. Okay. Just wanted to make sure I had that. And then the last one here. So Worthing, it’s interesting, I think both you and Waste Management, and frankly, I’ve even seen it out of some of my transports, they’ve had a really slow start to the year on the CapEx side. So I’m curious if you’re having problems related to truck production issues with the semiconductor shortage. Basically, do you actually think you’ll be able to spend the full $625 million this year?

We’ll spend it. We’ve already – the question will be is there’s a mix shift a little bit. I mean, obviously, we’ve had some opportunities to buy additional pieces of property. We’ve already gone in a traditional yellow iron commitments and really get a head start on 22 this year. We’re anticipating some trucks to shift out of this year into next year just because of the timing of deliveries. Look, if you somehow were to start today and put a new order and chances are, you get the chassis in early Q4 and you get the full unit with the body sometime in Q2 of next year, right. And so clearly, the lead times have stretched out. But obviously, we were ahead of this year’s requirements because we got a very early start last year in making our commitments for 2021, much like we’ve already done, making our commitments for most of 2022.

Okay. So you’ll spend it. All right. I appreciate the time. Thank you.

Our next question comes from Jerry Revich with Goldman Sachs. Please proceed.

Hi. This is Adam Bubes on for Jerry today. And congrats on a great quarter. I was wondering if you could help me think about potential to accelerate landfill gas development and put that in context of where you are today on that front?

Sure. As we’ve said for a while now, we’ve got a handful of projects that we’ve been working on for four to five years by now. The first one – the next one, I should say, of any size will likely come online in late 2022 or early 2023. We’ve got – beyond that one, we’ve got three or four other ones that are within the span of our sustainability report that we put out with our targets that we laid out. And so I think the number of opportunities that we talk about are four to five in total. That’s not too dissimilar to what I heard coming out of waste management the other day, but you got to remember, we have about third of the number of sites they have. And so we’ve got a great opportunity ahead of us. These are – these planning cycles take time, sometimes your timing, the launch of a project, based on permitting landfill permanent expansion conversations you’re having with municipalities. And so it’s not clear-cut as saying, all right, let’s go build one tomorrow and put a shovel on the ground, right? And again, yes, the economics are attractive at these levels. But you’ve got to remember, the economics are attractive at the lower RINs over the past couple of years as well. Instead of a two or three-year payback, maybe it would have been a six or seven-year payback, but even a six-year payback is attractive at the lows that you saw RINs hit a year or two ago.

Okay. Thank you. That color is really helpful. And then lastly, can you help calibrate me on where commercial industrial and residential volumes are versus pre-pandemic levels?

Well, as we mentioned, when we look at data points like our roll-off pulls and our landfill tons, we’re at or about close to or, in some cases, exceeding where we were pre-pandemic. So they’ve largely come back to those pre-pandemic levels. Commercial, probably not quite the same, a little slower because you don’t get that real time movement, but everything is trending positively.

Yes. Our most recent full month data for the commercial sales side, I mean, I think we’re running about 140% of budget. And so it just gives you a sense of what’s happening on the small container side as well.

Great. Thank you so much.

Our next question comes from Michael Hoffman with Stifel . Please proceed.

Hi, good morning and thank you for taking the questions. So I start out with more of a comment, I think Worthing you’ve been connections for 17 years. And in that 17 years, you set a policy, you’re going to do guidance at the middle of the year. And to be very clear, you’re standing by that policy.

Well, we’ll confirm that once this call ends, right. You won’t hear anything from us. Yes. I mean, we’re going to update on our Q2 call. Obviously, people can take a gene is to knit together what’s going on in the margin side and what’s going on the revenue exceeding. And we’ll have better insight on that, and we’ll do one update in July for the balance of the year.

What’s you’ve done for 17 years. So people should read through…

That’s been 18 years, but – it’s been 18 years, but I’ll give – COVID was, I guess, a non-year so we’ll skip COVID year.

And just to help frame this a little bit, typically, your first half is 48% of the full year EBITDA and the second half is 52% based on adding one and two together, you’re at 50% of the current guide. So read through as you choose.

Yes. I mean, it’s tough to know kind of the sequencing quarter-to-quarter this year, just given the quirkiness of the pandemic and reopening and things like that. But look, I mean, you saw the revenue relative to our expectations in Q1. If you annualize just that, that’s what about $100 million or so in revenue. We’ll see if that still stays the case when we reguide in July. And obviously, the margins, as I said before, we guided 50 basis points up for the full year. We’re already at that point by mid-year. And so there’s likely margin upside too to how we guided.

On inflation, have your vendors been able to push through any of it yet? Or is this something that probably shows up in the 2022 capital spending?

It depends, I mean, on the capital side, the trucks that we had, as I talked earlier, about getting a head start on the orders in 2020 – for 2021, we had already locked in much of the pricing for the fleet that was in production this year. But to the extent that we put new orders in after the surcharges get implemented, those will be subject to that. But for the bulk of our CapEx, at least in the fleet side this year, we had the pricing already locked in ahead of that.

And in 2018, the industry saw three points of inflation happened real time. And you particularly led the way with an incremental open market pricing. Do you see any need to do that based on inflation issues? Or is the fact that your retention is so good, you’re covering it anyway?

Well, if you look back, I mean, we talked about – second half of last year, we talked about pricing being kind of 3.5% to 4%, this year with a bias for 4%. And here we are sitting, call it, 4.5%. And so the way this year is playing out, we’re already attaining higher than expected pricing, because in some cases, we’re also anticipatory of some inflationary – inflation pressures out there, some likely wage pressures because, again, we started – we had a huge head start on wages last year, the way we pushed up wages and other support for the field. And so to the extent that we continue to see an increase above and beyond what we have currently anticipated, and we’re already anticipating above-average wage pressures. Obviously, it’s a just a market is bearing it. I mean, look no further than a P&G or other consumer product companies that have already telegraphed an 8% or 10% price increase in their business this year. And so again, it’s four – people look at 4, 4.5 and say, wow, that’s so attractive. But you start looking around the landscape, and that does look so big anymore. But I also note, look, it’s – we also cognizant of the power of volume when it comes to margin flow through, right? Because you can’t just look at price and say, hey, I can’t – I don’t have the ability to recover the volume. You’re seeing the high flow-through in the recovery. We look no further than our western region, which as Mary Anne said, had positive volume in Q1. You just look at our 10-Q and see the region – margin performance year-over-year. And our western region was up over 200 basis points in EBITDA margins, again, on the lowest price. And so it’s always not just about price. It’s about, again, quality of revenue and the flow-through and the pricing of that flow through on incremental volumes.

And just to remind everybody, the lowest price is because a lot of that business is indexed. So it’s leverage…

Correct, on a lagging basis. And so obviously, inflation increases this year, you’ll get the higher indexed pricing for next year.

And then Mary Anne, switching gears to the guide for 2Q. If I think about the mix between countries on volumes, are you expecting Canada turn positive one off of a negative one, 2Q? And then it would suggest even if it was marginally positive, the U. S. will be nicely positive, like 6% to get to 5%?

Sure. So what we’re expecting, Michael, is sequential improvement in all of our regions. And I tend to think of the more impacted regions being Eastern and Canada, both still lagging the overall reported volumes. And just off the top of my head, just trying to remember if it actually is positive.

Canada was positive in March.

Yes. March. Yes, you’re right. Positive for the full Q2. That would be the expectation. And taking a step back, the strongest sequential improvement we’re expecting Q1 to Q2 is actually in those lagging markets, so between the Northeast of the U.S. and also in Canada.

Okay. And then back in the market that’s doing renewable gases, and it’s making a big deal about this opportunity in landfill gas. And I’m just curious, you all are developing your own. Waste is going to develop its own, and I expect the others do, too. So are they trying to hone in on something here? Is there an opportunity maybe to offload some of the volatility by letting an outsider development and capture royalties? How do you think about all that in the mosaic of developing these projects?

Well, again, as you know, landfill gas has been captured for a long time. And going back in the old days, look, gas has been captured. In many cases, we may have JV already with a third-party to come in who wanted to go back then, the thing called, power plant and generate electricity, right? And so we had a revenue share agreement in place with those folks. And those – so we already have the gas in those sites already committed to on the contracts. Now when those contracts expire, we have a chance to reevaluate the other revenue share or what we want to do with the gas, right. And so I’m not surprised that the number of opportunities when people talk about what can be done, you’re not hearing about 80 new plants can be built for each company because so many projects have already been committed to. And so it’s landfills where you either have existing contracts waning or you’ve got landfills that are finally generating enough gas that it makes sense to do a renewable plant. But it’s – again, this is not something new. Everyone has got a different portfolio. But obviously, as the revenues increase and the value the royalties and those locations increase, so no, it’s not like, again, let’s go capture gas because it has value. That’s already in the system.

And to put this in context, you have a lot of landfill gas operations, you have very few high BTU, and it’s the high BTU that is drawing all this attention because that’s where the RIN comes. The traditional pull it off, low BTU, turned it into electrons, put it into the grid, doesn’t have a RIN play in it.

That’s correct.

Right, okay.

That’s a good way to think about it.

Right. And that’s the difference that everybody ought to be pay attention. Okay. And the free cash flow upside, how much is going to be from operations on solid waste versus resources?

We haven’t broken out the different components because, again, even on resource recovery, for instance, we’re looking at building a new recycling facility, they will break ground on during probably in the next few months. And again, how do you allocate that CapEx to just resource recovery, right. And so we look at it holistically with regards to where the cash flow is coming from.

Okay. Nice start. Thanks.

Thank you.

[Operator Instructions] Our next question comes from Hamzah Mazari with Jefferies. Please proceed.

Hey, thanks guys. This is actually Ryan Gunning on for Hamzah. Could you talk a little bit more about the ESG goals and the investment you highlighted? And what might be misunderstood by some aggregators that you think other constituents like ESG fund managers should be more aware of?

Sure. Happy to do so. And I would say, in general, we’re really encouraged by the amount of dialogue and focus there is on ESG and the targets that we laid out in October and our updated sustainability report because we think that as a – not just for us, but for the industry as a whole, the recognition of the fact that we’re doing things like landfill gas projects in the ordinary course of business, and we have been for years is probably the single most misunderstood or underappreciated aspect of what landfills do and what we’re already incentivized to monetize to capture. Worthing talked about increasing that capture, those are all good things for us, because they create more value. And so we’re – I would say that is one aspect that’s probably less appreciated or was and is now more appreciated. So that’s one of our goals. To your point, was to increase that biogas recovery by 40%. And these are long-term 15-year goals. Another was increasing our resource recovery capacity and processing. As Worthing mentioned, we look at those projects, whether it’s buying recycling facilities, which we bought a couple of over the past couple of years to internalize more of our own recycling and structure the business to be able to derisk that aspect of the business in terms of processing fees. So that’s a good thing for us as a company, and we’re happy to do – we have more recycling capacity and provide that service for our customers. So increasing that by 50% and then also increasing the processing of our leachate on-site, where we talked about getting it to 50% on site. We think that’s a prudent thing to do. It makes sense financially, environmentally, getting trucks off the road, trucking leachate to third-party facilities, and it derisks that aspect of the business as we move forward. So those are the types of things we’re doing in conjunction with also on the social side, the importance of safety that we’ve been focused on all of these things for years. We’re happy to outline them and talk about continuous improvement in our safety metrics and how we think about employee engagement with our service leadership scores and the importance of culture. Again, we’re happy to describe them as being part of an ESG platform. We really view them as part of running a good business and things that we would be doing regardless of the focus on ESG.

Yes, we applaud the sell-side and getting out the message. When you say what’s misunderstood the aggregators, probably a lot because aggregators don’t talk to us.

Got it. Thank you. That’s all super helpful. And then switching over to the E&P business, and it’s a different backdrop in energy since you purchased that business. Can you just talk about like what large margin impact is there and what the synergies of that asset are with the rest of the portfolio?

Yes. Look, it’s a landfill-based business, right. I mean, we said it from day one. I mean, we’re not in the liquid side, we’re not in the rig side, top side. I mean, we are a disposal-oriented company. And so it’s – we take E&P waste at several of our traditional MSW sites as well. And so from an operations standpoint, it’s no different from moving people around between different types of landfills, it’s no difference. Look when E& P dropped last year, we’re able to just reassign and relocate many folks from the E&P business to landfill openings within our landfill network. And so no, it’s – again, it’s – we talk about it, it’s more just a landfill. I think of it as a special waste stream that can swing a little bit more than others. But no, it’s right down the center of the fairway with regards to landfill and disposal.

Got it. Thank you guys so much.

Our next question comes from Stephanie Yee with JPMorgan. Please proceed.

Hi, good morning. I just wanted to follow-up on that E&P question. I guess, your guidance is saying that you’re expecting E&P levels to be in line with where things are currently. But I think rig counts have been moving up. So I just wondering if you’re seeing any green shoots in E&P waste activity in your business? Or you’re expecting that to come through kind of maybe in the back half of this year?

Yes. We think it may come through in the back half of the year. I mean our guys are confident about that, but we would never guide that. I’d rather see it happen versus provide that any sort of outlook. And so the volumes in the site are actually up but as we saw in the last downturn – or the prior downturn, the price per ton is down. We saw about a last downturn, if you go back several years ago, I think pricing compressed some 15% or 20%. And we’ve seen a similar compression on that side in this latest downturn. But then as the rigs continue to come online as more and more volume gets out there, you see both the recovery of price as intersecting with that higher ton coming into the site. And so we expect an improvement in the second half. Again, we would never factor that in our guidance. The other important thing, though, is from a margin standpoint, as we’ve guided the business and operated in this downturn, we actually brought the business to margins at or above reported margins for the full company. And so our folks have been very proactive at managing in this latest cycle.

Okay. Okay. That’s helpful. And I was just wondering if you’re baking into your guidance, any costs coming back. I know we’ve talked about labor, but just any routing efficiencies or productivity or cost cuts that you made during the pandemic? Are you baking any of that coming back in the second quarter and maybe that’s being offset by the benefits from recycling and room prices on the margin front?

No, when we think about margin expansion in the underlying business, we would say that at some of those costs are coming back in. We’ve had – if you look at Q1, there were so many line items that were down year-over-year as a percentage that helped drive that margin expansion. And there are some things that are coming back in and one that we’ve talked about is medical expenses, for instance, where we’ve seen that run rate, which declined, those costs declined pretty dramatically during the pandemic, and we’ve talked about it for the past few quarters. They continue to come back. So that’s one example. I’d say there’s some discretionary cost travel meetings a little bit, that’s coming back in. And we look forward to those costs coming back in, which is why when we talked about communicating our full year expectations, we said we factored in some of those costs coming back in. So we’d expect that to increase over the course of the year.

Okay, great. Thank you.

Our next question comes from Noah Kaye with Oppenheimer. Please proceed.

Thanks for taking the questions. Worthing, when you say the M&A pipeline and level of dialogue with privates, it feels like they’re at record levels, and we have the context of what M&A has been for this company in its history. I pay attention. And so I want to spend a little bit more time on that, if you don’t mind. First, kind of to better understand how you might think of the cadence of some of these M&A opportunities getting signed over the course of the year. Does this feel kind of back half weighted? Do you think there’ll be some considerations, again, around potential tax law changes that impact the timing of when they get done 4Q versus 1Q? Just what’s your sense in terms of cadence for the year?

Yes. I mean, I think the cadence is consistent with what we said in February and earlier on the call today, which is – look, it’s a back half weighted from a closing standpoint, which actually means more contribution rollover into 2022 versus contributing this year. But again, to your point, the potential tax law changes, especially with regards to cap gains is a driver for folks to get the queue. And so again, when I look at the number of opportunities that we continue to speak with, but I see the conversion of those to letters of intent in order to get into diligence. Again, it’s just a – it continues to increase month to month to month as you move through the year. But again, look, as we’ve always said, we’ll knock down our typical $125 million and $175 million or so of acquired revenue to start chunking it up to $250 million, $300 million or $400 million. You’ve got to get a handful of companies that are in that $50 million plus range in order to start chunking it up like that. And so that’s the big swing. It’s going to be, how many of those ultimately do get done versus don’t get done. And so again, the range of likely to possible is probably also as wide as it’s ever been.

But your confidence level at this point in some of those chunk years getting done this year, where would you put it at?

Again, I would never – we always say, never assume we get deals done, many things can happen along the way, right. But clearly, things are quite active.

Yes. Maybe any question is easier to answer. I think we’ve certainly seen over the past couple of years on some of the larger deals in the space take a longer time in terms of the regulatory process, DOJ reviews, things like that. Since you have a little bit of a different market footprint than some peers, can you just comment on how you might see that more or less impacting the pace of some of these deals that you…

Yes. I mean, if you look at both the transactions, I think you’re referring to, those were multi-market, multi-state acquisitions, where given who the acquirers were, there were natural overlaps across a handful of states, right? And so the level of review was protracted. And obviously, COVID on top of that and changes now with the DOJ with changed administration, things just got dragged out in those cases. And so our bread and butter are doing – primarily doing, again, $20 million to $40 million revenue transactions episodically, companies that are north of $100 million. But if you step back, those are companies that are primarily in singular markets and singular geographies. And so – and in those cases, we’ve not overlapped in those geographies, right. And so it’s – from a DOJ getting through the deals, it would have controlled their timing of how quickly they’ll pick up a call and review it. But hopefully, the process to get through the DOJ is not as cumbersome as what I would call these multi-state – larger multi-state transactions that our few larger peers did.

Okay. And I guess just the last kind of related one around capital allocation flexibility. We’ve always thought M&A, after the dividend, was kind of the first and best use of capital for this company. If there’s not a meaningful increase in M&A or buybacks, the leverage is going to be well below what it’s historically been, which is kind of a credit to the cash flow performance of the company. So I guess, in general, we don’t want to hold necessarily any specific leverage target, but might we see maybe a little bit lower leverage trend than usual just to give yourself some flexibility around the uncertainty of the timing of some of these deals closing. Is that a fair way to think about it as we look to the back half of the year?

No, I mean, as we said on the call, we’ve already repurchased about 1% of our shares this year. And so those who do the math on that outlay, when you put that – the dividend on top of that, and then you look at the – again, when I said the range of likely to possible is wide. When you go to the possible side, it’s over $1 billion in outlays, right, on M&A. And so it’s just – it’s a hard number to peg right now, but the good news is we can do all the above. Even if we did what’s possible, which again, low probability, but what’s possible, our leverage still probably doesn’t even touch 2.5 times on a net basis. And so again, we’ve got great flexibility. We’re not trying to take leverage down near term, and we’ve deployed a lot of capital, return to capital to shareholders already. And again, the M&A outflows are still ahead of us. And again, cash is still building into this.

Great. Thanks so much for the color. Take care everyone.

Thank you.

Mr. Jackman, there are no further questions at this time, please continue with your presentation or closing remarks.

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’re allowed to answer on the reg FD, reg G and applicable securities laws in Canada. Thank you, again, and we look forward to speaking with you at upcoming investor conferences or on our next earnings call.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.