Mary Anne Whitney: Sure. I guess the other point, just the math behind it, if you look at the fact that we are guiding to 120 basis points, margin expansion in ’24, it says we are halfway there since we just delivered 31.5. And so there are various ways to get there and Ron ran through the opportunities. But if you just look at ‘24 as an example, and the outsized margin expansion in the underlying business, it gives you a sense of what’s possible. And so then the question just becomes not so much, is it 34. It was never meant to be an endpoint. It was just illustrative of the ability to get back to prior peak margins. And we feel now well positioned to do even north of that.
John Mazzoni: Got it. Thank you. Congratulations again on the strong results.
Ron Mittelstaedt: Thank you very much John.
Operator: Our next question comes from Michael Hoffman from Stifel. Please go ahead with your question.
Michael Hoffman: Hey. Happy Valentine’s everybody.
Mary Anne Whitney: Thanks Michael.
Ron Mittelstaedt: We were going to start that way, but thank you.
Michael Hoffman: I thought you would, but okay. Anyway, so can we get back to operations for a minute and talk about fleet. Am I correct, you would like to buy 10% of your direct fleet, your routed trucks, we have been below that, what do you think is the outcome in ‘24 and correspondingly, how that sort of works its way through repair and maintenance cost?
Ron Mittelstaedt: Yes. So, first off, Michael, I think your first comment is about percentage is accurate. Look, we – I have been around. We have gotten approximately, if you look at ‘22 and ‘23 around 90%, maybe a hair below of our fleet in one way or another delivered. So, we are running about 1 in 10 short, okay. We are being told that, that number should compress a little bit in ‘24, but there will still be some fleet push from ‘24 into ‘25. We are being told that, that should be closer to 5% to 8%, then maybe 10, so you see improvement. And then we are being told that it normalizes in ‘25. So, we believe by ‘25, we will be back on track with the normal fleet replacement. As far as the maintenance side, look, the good news is it’s in the numbers.
And it’s in the guidance. And it’s not one of the key drivers to delivering 34%. Quite honestly, you don’t want accelerated fleet at a time when your turnover is highest and you are doing the most damage to new equipment. So, we wanted to bring turnover down quite dramatically before we focused on any sort of movement upwards in fleet replacement because we are – it’s just not going to show up in the maintenance when you have got so many new employees. So, it actually has been somewhat of a blessing, to be honest. And we feel good about the timing of how the fleet will – allocation will improve as we go through ‘24 into ‘25.
Michael Hoffman: Okay. Switching gears to Arrowhead, it has a pretty big tons per day capacity. Where are we in maximizing that utilization? You alluded in your comments, you have been redirecting your own volume, so what’s the trend look like?
Ron Mittelstaedt: Well, what I would tell you, Michael, so as you know, maybe not everyone does, Arrowhead has a 15,000 ton per day permit. When we acquired Arrowhead, it was handling just under or around 3,000 tons a day. We have improved that by 35% or more already. I believe we will exit ‘24 at doubling where it was originally. And I think longer term is ‘25 into ‘26. These things take some time. I think you will see us approaching triple what we originally acquired it at.
Michael Hoffman: Okay. And then as you think about the secure business, you are dependent on production. And if I remember correctly, even in COVID, the Canadian production didn’t go down that low given all the disruption. So, what’s the sensitivity to shut in, help everybody get comfortable that this is really stable?
Ron Mittelstaedt: Yes. So, as you said, Michael, I mean the Canadian E&P market is very different than the U.S. Again, just to reiterate, the U.S. our R360 business is about 80% drilling oriented, so it is highly sensitive to rig count and crude price. The Canadian market is really inverted because they do not do a lot of fracking, so their market is 80% to 85% production oriented. We look back over a 5-year period during diligence that the assets we would be acquiring, and crude move – Western Canadian crude moved from a high of about $80 a barrel to around 32 [ph]. So, that’s a pretty significant swing and revenue changed 8% peak to trough and EBITDA changed 12% peak to trough. So, I think that shows the significant difference between a production-oriented model and a drilling-oriented model. And that’s quite honestly, one of the things we loved about the assets is it de-risked our combined portfolio and brought it more to a 50-50 balance.
Michael Hoffman: Got it. And then Canada, specifically, Ontario, which you have a nice business is rolling out an EPR program. Were you one of the beneficiaries of their contract award?
Ron Mittelstaedt: No. And we were – that was quite intentional, to be honest with you. So, first off, let us say this. We think the EPR opportunities in Canada are nice opportunities, okay. There are nice opportunities for providers whose business is predominantly a residential platform. We have purposely tapped away from since acquiring Progressive and have shed most of the residential business in Canada purposely, and we are much more of a commercial and disposal platform company in Canada. And that’s reflective, you can see our segment margins in our filings, and that is reflective of what we have done. If you look at that relative to our peers, our margins are almost double. So, we are not looking to move heavily into the residential muni contract business in Canada.
That business tends to be a 5-year type business. Those are very short-term contracts. And if you have assets, particularly, Murf [ph] assets that are underutilized and you are able to add a relatively nominal amount of capital, those investments make a lot of sense. That’s not our asset platform in Canada. So, it really – I think it’s a great opportunity, but it’s not an opportunity that we are really pursuing because of asset mix.
Michael Hoffman: Got it. Last one for me. So, RNG comes with some incremental volatility potentially because of the credit. What is your strategy around defeasing that risk?
Mary Anne Whitney: Well, sure. Michael, as you know, and for anyone who doesn’t know, we – that’s just fundamental to the way we approached RNG with the portfolio approach and the variety of ownership structures and the fact that we will own outright about a third of the projects that we ultimately participate in. So, right there, that’s one element of derisk and the other is hedging RINs. And we opportunistically put those hedges in place. We have done it in the past. So, we will – that’s how we think about it fundamentally, and that’s the way to derisk it.
Michael Hoffman: Perfect. Thanks for taking the questions.
Ron Mittelstaedt: Thank you, Michael.
Operator: Our next question comes from Walter Spracklin from RBC Capital Markets. Please go ahead with your question.
Walter Spracklin: Yes. Thanks very much. Good morning everyone. Just wanted to – two, hopefully quick ones here. First, on the rail side, the waste rail side, Ron, you alluded to it a number of times here on the call and especially when you did the deal. How much can you scale that up, do you think, if you were to – if the economics look – appear to be quite attractive on this? To what extent you fully utilized in every way do you think you could scale this up, or is this more surgical tactical type of option for you that won’t really move the dial in your total numbers, but are nice on an incremental basis?
Ron Mittelstaedt: So, I have got to dissect it a little bit, Walter. So, first off, as I mentioned earlier, that landfill has the capacity to take 15,000 tons a day when we acquired, it was taking 3,000 tons. So, it was 20% utilized, if you will, right. And I mentioned that I thought by the time we exit ‘24, we will double that, so that it would be 40% utilized. And that as we come through ‘25 and ‘26, we think we can get that up to 3x where we were. So, in that scenario, 60% utilized. There really is no rail constraint on utilization. It’s just incremental cars and loading and track. So, that is not a scalability issue. So, look, in the size of our corpus, is this going to be something that moves the needle 100 basis points on its own, no.
And we have never said that. But here is how it moves the needle. It moves the needle on what our growth can be M&A-wise because of the market areas that we can now integrate that we never looked at before. So, in that way, I do consider it a needle mover. Put it at a point or more in M&A growth per year for a while, I think it could. And I think the compounding of that is something, so that’s where I would say. And that’s one of the reasons I gave commentary that we are fairly bullish on the M&A environment for ‘24 as we sit here 45 days into the year. So, hopefully, that gives you some color on our thoughts on that opportunity.
Walter Spracklin: That’s great color, Ron. I appreciate that. And my second question here is on volume. I know I have had some inbounds on negative volume that you have had through the course of 2023 and the negative volume you are now projecting for 2024 and some are comparing that to your peers, which are in the positive territory. Two aspects, I know Mary and I have talked about this before, but I just wanted to flag it. There is not really an apples-to-oranges – there is an apples-to-oranges compare there, I think, and perhaps you can elaborate on that. And then second is on how much of the volume is really purposeful shedding that you completed in 2023 that’s just carrying forward to 2024 as opposed to a projection for a persistent negative volume outlook for your company?
Mary Anne Whitney: Sure. So, happy to address those questions. So, first of all, to your point, I do think that we – different companies communicate both price and volume differently and ours is strictly solid waste volumes without the benefit of incremental R&D or recycling facilities coming online, which would be additive, I believe to other people’s volume calculation. So, just with that as a starting point and then of course, what also goes along with that is how we communicate price. And when some people talk about core price, it’s not what they ultimately report, but it’s what they put on the street. When we give you price, those are the numbers we expect to report. That’s how we guide and that’s what we talk about with respect to price.
So, necessarily or understandably, it means that the way we – we are talking about price one way, it’s going to drive how we talk about volume. And so again, the calculations are probably a little different. But here is what we do now. We know that as we exited 2023, we had purposeful shedding. So, if we were at a run rate of negative 2.5% volume, we said about a point of that is purposeful shedding from contracts that we walked away from or rebid in such a way that we knew we wouldn’t ultimately hold on to it, and that was okay because they were poor quality revenue contracts or customers. Additionally, we have acknowledged that in our pricing strategy, we acknowledge that there is a price volume trade-off, which we think is an acceptable trade-off and we encourage people to look at where margins go when you make that trade-off.
And so if you see – look at our exit rate of about one point for each of those two things, and then I would say what are specific drivers like difficult comparisons or weather would be additive to that. So, then that’s why, as we said in Q1, coming in, the exit rate was around 2.5%. And we know that we had not only tough comparisons in Q1 last year because of hurricane-related disposal, but we also have the weather we have already seen. And so that’s how we think about coming into the year, most negative in Q1 for that reason and that improving over the course of the year as we anniversary some of those purposeful losses.
Walter Spracklin: That’s great color…
Ron Mittelstaedt: And Walter, I would add, again, we talked about this on the last call. But so – number one, the purposeful shedding by us in our model is not new. We have done this for decades, okay. Others who are not really very active at this point in M&A, don’t have that in their model to do, okay. So, that is a difference. When we are acquiring, use a number, $200 million, $300 million a year of revenue year-in, year-out, year-in, year-out, some years double that like ‘22. We have said there is maybe 15% to 20% of private company revenue that when you acquire it, you know you are going to either price it to improve it or lose it. So, the difference of why that shows up now is that the underlying economy is effectively dead flat.
And you heard our largest competitor in the nation who would be the greatest proxy for the economy on volume, say it’s zero to 1%, Oh, and that’s with RNG making up the 1%. So, they said it was zero. That’s what – so, if it’s zero organic volume growth at zero to 1% and you do shedding, you are negative. It’s just that simple.
Walter Spracklin: Yes. That makes total sense. I appreciate the time.
Operator: Our next question comes from James Schumm from TD Cowen. Please go ahead with your question.
James Schumm: Hi. Good morning. Just high-level question and you touched on it a little bit. But historically, you haven’t had a lot of exposure to recycling maybe relative to your peers. But I am wondering if that will change in the near future given recent advancements in technology or perhaps EPR legislation. And again, I mean you touched on it in Canada, but maybe talk about the U.S., if you could.
Ron Mittelstaedt: Yes. Well, number one, I think part of it has been a model difference, James. As I mentioned, we have substantially less urban exposure than some of our larger peers in our model. And a lot of recycling in the U.S. has occurred in the coastal areas, which tend to be more urbanized, okay. So, we just have a little bit less exposure to it. There is no question that technology will aid and is making recycling a better business model every day, every year. And can produce some very acceptable returns with the right market and the right technology. So, yes, you will see recycling over time grow as a percentage. There is also a push for diversion legislation and recycling in many states that’s up to this point, there had not been as much of a push.
