Waste Connections, Inc. (WCN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Waste Connections Company Update Call. [Operator Instructions] This call is being recorded on Monday, April 24, 2023. I would now like to turn the conference over to Ron Mittelstaedt. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us for this important announcement on such short notice. I would like to welcome everyone to this conference call to discuss the executive transitions described in our release from earlier today. I'm joined this morning by Mary Anne Whitney, our CFO; along with Joe Box, Director of Finance, as well as several other members of our senior management. As noted in our release, I have returned to the role of President and Chief Executive Officer, succeeding Worthing Jackman, who will also step down as a member of the company's Board of Directors and withdrew as a nominee for election as a Director of the company's 2023 Annual Meeting of Shareholders. 4 years ago, due to health matters affecting me in my family, we handed the baton to Worthing and ask him to assume the role of President and CEO. We recognize the value of his long tenure with the company and select an outstanding individual who has since done an extraordinary job through difficult circumstances. These last 4 years with the pandemic and hyperinflation have been challenging for leadership in all industries, and Worthing has done a yeoman's job in leading through this period. Together with Worthing, our Board of Directors has decided amicably, it's time for that baton to be passed back, and I have agreed to resume the role of CEO effective immediately. I'm excited to return to this role to serve our 23,000 employees and focus our efforts on servant leadership, our decentralized operating structure and delivering exceptional results. All hallmarks of the company for over 25 years. While this announcement may come as a surprise to you, I assure you that this decision is a result of discussions over a period of time by our independent Board members, Worthing and me and was made with the best interest of the company and its stakeholders in mind. We always endeavor to be transparent within public company limitations and want to assure you, there is nothing more to this decision than the Board's determination that a change was appropriate to ensure that we have the right leader for this time. That is the individual whose skill set and background are best aligned with the demands and opportunities of the current environment. There are no other issues or concerns, financial or otherwise behind this announcement. In fact, as noted in our press release issued earlier this morning, we are reaffirming our full year 2023 outlook as provided in February, which we look forward to discussing with you further when we deliver Q1 earnings later this week. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer as well as other housekeeping items.

Thank you, Ron, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainty. Factors that could cause actual results to differ are discussed both in the cautionary statements included in our April 24 press 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. As Ron noted, we will release Q1 2023 results on April 26. Therefore, on this conference call, we will not discuss financial results in the Q&A. I will now turn the call back over to Ron.

Okay. Thank you, Mary Anne. Before opening up the lines for questions, I'd like to say 2 things. First and foremost, on behalf of the entire Waste Connections leadership team and the company's 23,000-plus employees, I want to acknowledge the important role that Worthing played for over 2 decades and by thanking him for his outstanding service and contributions. From our beginnings in 1998 as the investment banker who took Waste Connections public, to his 14 years stent as CFO earning multiple institutional investor awards, Worthing has been an integral part of our value creation, including a total shareholder return of over 5,800% since the IPO. He has also been a trusted member of our leadership team, and it would not be an exaggeration to say that Worthing is the smartest person I know. He's also one of the most creative, committing and caring people have ever met. We are grateful for all that Worthing has done for the company, its stakeholders and the communities that we serve. His extensive efforts have helped shape the company we are today, and we all wish him well in his future endeavors. Next, I want to address where we are in our journey as a company and recognize our most important assets, our employees. For 25 years, Waste Connections has pursued a differentiated strategy focused on exclusive and secondary markets, with a decentralized operating structure and a servant leadership-based culture. We have always maintained that in any business, there are 3 types of assets; physical, financial and human. And we attribute our success as defined by our industry-leading metrics in several areas, including total shareholder return, not to physical or financial assets but to our focus on human assets, our employees. What sets us apart and drives differentiated results is the accountability of our local leaders who have the responsibility to make operating decisions and what we would argue is truly a local business. Our culture is the secret sauce that makes Waste Connections unique. It's the why and the how behind what our leaders do. So you may be asking, why make a change now? The growth and development of our leaders has never been more vital. We have enjoyed an outsized period of acquisition activity that began in 2016 when we doubled the size of the company through the acquisition of Progressive Waste. Growing revenue by $2 billion and expanding our employee base by over 7,000. In 2023, almost 7 years later, we are on pace for revenue of over $8 billion with an employee base that has grown by another 7,000 to over 23,000. As servant leaders, our most important job is to set up for success, those we have the privilege to lead. We need to double down on human capital, develop our greatest assets, our people and position the next generation to take Waste Connections to revenue of $ [indiscernible] million and more. To support the field, our Board has determined that I am best suited to assume this responsibility. I'm personally very excited to have this opportunity, and I look forward to reconnecting with so many of you, including long-term shareholders who have known Waste Connections, since our early days. Now before we open up the line for questions, let me address the topic that I suspect may be on your mind. I am resuming this position -- am I resuming this position for the long term? The answer is an unequivocal yes. As founder and former CEO, I have been part of leading West Connections for more than 25 years, and the Board believes that at this time, I'm the best positioned to assure that we are ready for the future. I'm committed to being here for the foreseeable future to execute our growth strategy and to train and develop our future leaders. We have an enormous opportunity and I'm excited, enthusiastic about what we will accomplish together. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

[Operator Instructions] Your first question comes from Toni Kaplan with Morgan Stanley.

Really appreciate it. Ron, just hoping you could talk about where you see the 2 or 3 biggest incremental opportunities going forward in the, let's say, next 6 to 12 months?

Well, Toni, I think today, the purpose is to talk about the transition and really not get into anything that's forward-looking. We are going to continue to execute the game plan we've done for 25-plus years, same market strategy, same operating strategies and growth algorithm. I clearly will articulate more of that on the earnings call on Thursday. So we want to try and focus this today on that. But look, I've been around. I hadn't left. I was Executive Chairman, and we're going to continue to do what we've been doing. You're going to see more of the same.

Okay. Great. Yes, it sounds like very continuous strategy. Any sort of change to that strategy that you would be thinking that you need to embark on going forward?

No. That have no plans to change the strategy. It's worked incredibly well for 25 years. I believe it's going to work incredibly well for quite some time. We have a lot of opportunity in the core solid waste business. See no reason to change anything.

Your next question comes from Walter Spracklin with RBC Capital Markets.

Yes. Thanks very much, operator. Good morning, everyone, and good morning, Ron. I haven't formally met you, but I've heard lots of very good things about you. So looking forward to that for meeting you in person. I guess my question, certainly getting a lot of inbounds on this, as you mentioned, it comes as a bit of a surprise, so bear with me. But what would you say was the catalyst for affecting this change right now? What prompted it? What prompted this change to happen right now?

Well, look, as I described in my prepared remarks, this decision really just reflects the Board's determination that a change was appropriate to ensure that we have the right leader for the right time. Companies evolve and that individual whose skill set and background are best aligned with the demands of what are the challenges are is really where that was at. I can understand why it comes as what you view as a surprise, and -- but that's part of being a public company and disclosure requirements. This has been part of an ongoing dialogue between Worthing and the Board for a period of time. But once you reach that decision, you have an obligation to disclose it.

Makes sense. Just on acquisitions, Ron, I know you've even been called in on a few deals and negotiations. Does this indicate that a change in [ tenor ] at all to the acquisitions? Do you believe that the acquisition pace has been appropriate? And would you or would you expect for it to change at all either to be faster and more or dial down in terms of the pace of acquisitions?

Well, Walter, number one, this doesn't signal anything on acquisitions either direction. I have been involved in all of the acquisitions over the last 4 years in my Executive Chairman role, not just a few of them, but it has no implication to any change in pace either way. It's not about our acquisitions or our acquisition strategy. That remains unchanged.

Okay. And last one for me, it's a little bit of a sensitive one, but I'll throw it out there. To your knowledge, is Worthing going to another firm or specifically to a competitor?

Well, number one, I can't speak for Worthing, whatsoever. But as I mentioned, this was a part of a longer-term discussion. It was amicable and we filed an 8-K before the market opened with Worthing separation agreement wherein we extended from 1 year to 3 years is non-compete. So I would tell you that -- I can't speak for Worthing, but that didn't does it sound to me like that's his intention.

Your next question comes from Noah Kaye with Oppenheimer.

You talked about the need to double down on human capital and better support the field. Can you elaborate on that a little bit talk? About some of the challenges that you're seeing from the human capital perspective and where your focus will be?

Well, look, [ Paul ], we've had a period of very outsized growth. And with that, the growth and development of our leaders has really never been more vital. Our most important job is to set up for success, those that we have the privilege to lead. And we just really need to -- as we use the word, double down our human capital and get them ready. Given my background in the field and my experience with servant leadership, it was -- the Board just felt it made the most sense for me to lead those efforts on a go-forward basis and make sure that we have the culture and continue to have the culture to make sure our next round of leaders was ready for the future.

Right. I appreciate that, Ron. I think one of the interesting things about this company and its history of integrating acquisitions and growing that way is the continuity that you've afforded to a lot of people who built our business over a period of time. So you have -- I guess the question is, how do you want the industry to perceive this transition? And in particular, how should people think about the continuity of opportunities at Waste Connections?

Well, again, so as I mentioned before, look, I didn't leave ever. I stayed as Executive Chairman and have been involved intimately with Worthing in a variety of strategic acquisition, personnel and other decisions all along. So this is just really a continuation of the strategy we've pursued for a long time. I'm not asking the industry to perceive anything other than what we've said. Worthing is a tremendous individual, has delivered so much for our company but our Board just felt at this time the skill set that was necessary going forward was a little more suited in my area than someone else's. Nothing more than that.

Right. Just to reflect that, you've been intimately involved in the major M&A this company has done for quite a period of time now. Is that correct?

Forever, we -- we've done over 750 transactions in 25.5 years, and I've been involved in every one.

Your next question comes from Jerry Revich from Goldman Sachs.

Ron, Mary Anne, Joe. Ron, I'm wondering can you just expand a little bit more on your additional areas of focus beyond the human capital point that you kindly fleshed out. What else are the other differences in approach that we should be thinking about from the transition?

Well, thank you, Jerry. I don't want to make this more than it is because it is not -- this is really about people and culture. And our differentiated model of being decentralized operationally and our servant leadership culture. That is what this is about and just continuing the reinforcement and the driving down of that further into the field on an ongoing basis because that is what has differentiated and made us successful. That's the answer to that question.

Super and Ron, I know you folks, as a company are really focused on quantifiable targets. And I'm wondering what does that mean for you folks as we think about the targets that you're going to be managing towards in terms of developing the next layer of talent, et cetera? Anything that you would quantify for us that you and the Board are thinking about as the key metrics?

Well, no. I mean, I think that question, if I'm interpreting it right, was related to our internal development of people. We have a very robust pipeline of internal people at all levels, and that is something we have continually focused on hasn't changed up until now and isn't going to change on a go-forward basis. So -- there is no change with regard to our strategy and the personnel that we have in critical roles within the organization.

Congratulations.

Your next question comes from Michael Feniger with Bank of America.

Hey, thanks, everyone. Ron, you cited the Board's decision, it was appropriate for the right leader at this time with your skill set and your background. What makes this time exactly right? Is it the tight labor market? Is it years of elevated M&A and now you want to hone in on integrating that and making sure that decentralized culture is being built appropriately? I guess I'm just trying to understand this transition with the idea of your skill set and you being a leader that specifically is on the ground?

Okay. Well, again, I don't want to repeat what we said, but that's really the entire story. So I will somewhat repeat it. Look, if you think about what we said, 2016, we acquired Progressive, $2 billion, 7,000-plus employees since approximately 2019, we've grown another $2 billion, another 7,000 employees. The skill set of the operating and decentralized model and the development of people through servant leadership is a critical component when you become a company of our size with a number of employees as we have spread throughout the U.S. and Canada. And so this is not something that is -- I understand you're hearing it today, and therefore, it sounds like a surprise to use the word you said. But this has been part of an ongoing discussion that has been fluid for a number -- for quite some period of time. So while you -- a surprise to you, it is not internally and certainly within our board a surprise.

Understood. And Ron, I know we talked a lot about culture and labor. Over the last 3 years, investments in renewable natural gas has become a theme, some players doing M&A maybe outside of nonhazardous waste. So outside of just the conversations we've been having about labor and culture, I'm curious over the last 3 years, I'm seeing some of these other themes emerge in the waste space. I'm curious if you have any views or comments on what you've observed the last 3 years and what that can mean going forward under your leadership?

Sure. Well, Michael, we will get into that on a go-forward basis. Today, I just want to focus on answering questions about this transition. Look, our strategy is going to remain unchanged. I have been intimately involved with Worthing with the senior management on -- looking at a variety of opportunities, as you described and at this point in time, we're going to continue to do what we've been doing that's made us successful. But we will have a call this Thursday, as you know. Happy to provide some thoughts on those type of questions in M&A. Today, I don't think it was not the plan to discuss that.

Your next question comes from Michael Hoffman with Stifel.

Ron, clearly, the marketplace here is struggling, right, as the nature of this question. And at the end of the day, you have been very engaged but what is also implied in this message is you'd like to get more engaged. And that ultimately, that's what this came down to is you want to be more engaged in this process of running this company, and this is what this transition is about and nobody should overthink it is you're just getting more engaged. Am I wrong about that interpretation?

Well, Michael. No, you are not wrong, but I think I would characterize it a little differently. Yes, I have been engaged as Executive Chairman, obviously, not on day-to-day things, of course. But this was a Board decision in collaboration with Worthing that led to this. Not my decision. So I am excited to be back involved on a day-to-day basis. But yes, so the answer you said is correct, but I would parse it a little differently in that this was a Board deliberated and amicable discussion.

Okay. Few years ago, you and I were sitting in a restaurant talking about what your day was like. And you talked about it being 60% to 80% spent on people. Where do you -- where are you on getting back up to speed on all of that and the importance of that people? How quickly do you get back engaged?

Well, I expect to be back fully engaged in about 2 hours on the people side and I expect the people side to take as it did before, it's 80-plus percent of the job, particularly in our model because it drives all the results. So I'll work hard to come up to speed quickly. I'm very fortunate. Again, I wasn't away. I think I've hired every member of the existing executive team and the regional staff and most of the divisional Vice President. So I know them. I see them at company events, industry events. So yes, but there is a time that I'll need to come up speed, and I'm going to work hard to do that quickly.

Your next question comes from Kevin Chiang with CIBC.

And welcome back, Ron. I guess when I think of the history of Waste Connections, when I think of stories you've told at some point in time in your history, you realize your turnover was too high and that kind of resulted in the servant leadership model that you have in place today? I know the pandemic has made some of these numbers a little bit wonky, but your voluntary turnover has creeped up to over 20% versus maybe mid-teens just a few years ago. Was that becoming a concerning issue for the Board in terms of not knowing what that meant for the organization in your early innings of your formation and maybe trying to get a handle on this, just given your plans to get revenue potentially to $10-plus billion in the next few years here?

Kevin, thank you. No, look, the question I think you're asking is, is something broken and the answer is unequivocally no. Nothing is broken. Our turnover has been trending down since the beginning of the year. It's still higher than we would like it, like everybody is in business in the U.S. today with the labor market, it can always be better. But that was not something that is at the core of any of this.

Okay. That's helpful. And maybe just more broadly speaking, as you mentioned, you've been intimately involved in the M&A process as the Executive Chairperson. Has integration gone tougher here, just given all that's happened in the broader economy versus maybe how you would have integrated an asset, I guess maybe pre-2020? Has that become more challenging for Connections or maybe the broader industry given the pace of the deal flow and maybe just all that's happening in the broader economy?

Look, first, again, this is not about something that is not going right. This is about opportunity on a go-forward basis and how we continue to do what we've done for 25 years successfully. Two years of a pandemic, a year of hyperinflation and a vanishing labor market and supply chains. That's tough for anyone in any industry that does acquisitions. So is it harder than it was pre 2020? Sure it is, not what any of this is about. You've continued to see exceptional execution by Waste Connections in the face of record acquisitions. So not what anything is about.

And your results obviously point to that. Welcome back again.

Your next question comes from Stephanie Moore with Jefferies.

I appreciate the time this morning. Maybe it would be helpful for investors that are newer to Waste Connections to the story. Maybe, Ron, you can discuss how your leadership style or view on culture differs from the last couple of years when -- when Ron was at the helm -- I'm sorry, when Worthing was at the helm versus prior to when you were running the ship? Just maybe just to provide some context of any difference that we should be expecting going forward?

Yes. Number one, I don't think there is any difference. Worthing and I have been together forever. We have the same values, the same commitment, and that's really what drives and I think has made us successful. But I will comment -- look, my background is in this industry for 35 years from an operating, sales and an M&A perspective, so those are areas that I have, I hope, a decent skill set in. And I am going to -- and I have pushed and been the architect behind our servant leadership focus, and that is where I will focus heavily, and we believe that is a differentiator for us. And we just want to underscore it, and it's all about culture, you know that's a nebulous word. It's a buzzword. We started using that word in 2004, 15 years before it was popular. So that will be my style. My style is about the operating part of the business and our culture and our people. And that will be front and center when I'm around.

And then lastly for me, could this foreshadow any additional leadership changes that we should expect in the next 12 months or so?

No. This has -- again, I'm looking around the room, everyone in here, I hired. So I do not anticipate that, and that is not what this is about.

Your next question comes from Chris Murray with ATB Capital Markets.

Yes. Thanks. Welcome back, Ron. Just a quick question. Just thinking about your comment about the fact that this has been an ongoing discussion for some time. Just maybe a different way to think about this. At some point, Worthing would probably would have had to transition just given his age. Is this just a different way to think about that? Or was that part of the discussion around why to make this change today?

Well, no. I mean, everybody has to transition at some point, they can't go forever, but that wasn't what this is about. I mean, if you're asking it maybe in a different way, look, we have a succession plan in place. We've had it for quite some time. We always do. Worthing and I have been, along with our Board, very active in that. The people that we think of in all the critical roles on a go-forward place basis, are the same people that are in place today. But I think the Board did feel that I might be a little more suited at this point in time to develop those people for the next generation.

Your next question comes from Sean Eastman with CIBC Capital Markets.

I think that might be me. This is Sean Eastman. Just continuing on the succession planning element. Ron, perhaps you could -- maybe try to set a rough expectation for the longevity you think you have? I mean, you definitely sound quite chipper. But if this is the right time for you to be stepping back into the role. What will be the right time for you to kind of pass the torch?

Well, I like the chipper comment. Look, number one, I think we said this, we did and I want to reiterate. This is not an interim situation. This is -- I call it a permanent situation. I plan to be here 5-plus years for the foreseeable future. The right time will be when that skill set that is necessary and the person or people that are necessary are ready for it. It will not be a surprise. It will be -- we pride ourselves on transparency and not surprising the market or anyone else, and it will happen in that way as these things naturally do. But as I said, this will be -- these will be internally developed people that exist today.

Your next question comes from Tyler Brown with Raymond James.

Ron, I just want to make sure that I've got it because I'm still a little unclear, but is the Board being proactionary or are they being reactionary here? And what I mean is has culture floundered over the last couple of years given just all of these deals? Or is the Board more concerned that culture could flounder without change?

Tyler, excellent question. Should have made that in some of my comments earlier our answers to these questions. Number one, nothing is broken, nothing is floundering, particularly with regard to culture. This is a proactive decision that the Board made to make sure that we don't develop cracks in the foundation of the culture and the operating structure of the company because once you do, they're hard to fix. So this is not a reactive, it is a proactive about what things look like on a go-forward basis and who had the skill set to make sure we're always ahead of the curve. Nothing more, nothing less.

Perfect. That is extremely helpful. So -- Likewise, I'm a little curious about the Board's thinking about an immediate transition versus a transition period. Just why did the Board choose the immediate round as opposed to a smoother period?

Well, Tyler, the challenge in a public company with the way disclosure and laws work today. Is that whether you choose to do something today or you choose to do something in 3 months. Once there's a meaning of the mind that, that is the route are going, there's a disclosure obligation. It is the same. So -- I am in touch with Worthing. Worthing and I have regular communication and have had through the weekend, okay? So you shouldn't think that there isn't an orderly or I don't think you use that word, but an off-ramp or longer transition. Remember, I was not gone. I was in a different role, okay? So the necessity for a long transition is less than someone who hadn't been with the company since its inception. And in a different role, granted but very up to speed on many things that were going on at all times through our team and through Worthing.

Sure. Okay. That's very helpful. My last one, so I know the long-term incentive compensation plans are going to be set by the Board. But should we expect a focus on human capital making its way bigger into how EOs are compensated as it sounds like this is obviously a very big and important differentiating point?

Yes. Look, Tyler, at the end of the day, the best metrics, I believe, from a shareholder standpoint are our financial return and operating performance metrics. However, I believe if you drive the human capital asset and the culture, that will drive those results. So I think it is a direct linkage to human capital, but it doesn't change the metrics from compensation that our executive or field personnel are rewarded on.

[Operator Instructions] Your next question comes from Michael Feniger with Bank of America.

And I apologize if I missed this, Ron, you guys reaffirmed the full year '23 outlook. Does that include the Q1 guide?

Well, so number one, Michael, no problem that you didn't miss anything. We reaffirm the full year '23 guidance. That is it. We are within 48 hours of the earnings release. But what I can tell you is if there was a concern in Q1, you would have already heard it. You have not. You will see that on our quarterly earnings call.

There are no further questions at this time. Please proceed.

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

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.