Waste Connections, Inc. (WCN) Earnings

Management highlights

- Core Business & Pricing Performance * Q1 2026 results exceeded analyst expectations for both revenue and EBITDA, with core pricing reaching 6% that puts full-year 2026 core pricing on track for the high end of the 5% to 5.5% guidance range. * Improved pricing dynamics driven by the AI-powered pricing tool, which has delivered ~20% improvement in customer retention and pricing effectiveness, supporting stronger yield. - Operational & Human Capital Improvements * Voluntary employee turnover dropped below 10%, marking the 14th consecutive quarter of improving retention. Lower turnover has driven record safety levels, higher employee engagement, better customer retention, and lagging margin benefits from lower risk management costs. * Severe winter weather in the Northeast caused ~$5 million in unexpected additional fuel costs in Q1, but 45% of 2026 diesel requirements are hedged, and fuel surcharges will recover most incremental costs with a lag, primarily in Q2. - Technology & AI Investment * The company is rolling out 7 targeted AI initiatives by 2027, with 3 implemented in 2025, 2 rolling out in 2026, and 2 more planned for 2027, at an annual spend of $25 million to $30 million. Early results show most initiatives deliver a payback in under one year, and management expects up to ~100 basis points of cumulative margin expansion once all 7 are fully deployed. - Mergers & Acquisitions * Management expects another above-average year for M&A activity, with a strong pipeline of deals. A series of small, core solid waste transactions totaling ~$100 million in aggregate annualized revenue are expected to close by the end of Q2 or early Q3 2026, consistent with the company's historical 'single and doubles' acquisition strategy. The company remains disciplined on valuation. - Capital Return & Balance Sheet * Year-to-date, the company has repurchased ~1% of outstanding shares for ~$365 million, maintaining its commitment to returning capital to shareholders. A $600 million public note issuance in early March diversified funding sources, leaving the company with ~$1 billion in liquidity, net debt to EBITDA leverage of 2.75x, an 8+ year average debt tenor, and an average interest rate of ~4% with 80% of debt fixed. - Chiquita Canyon ETLF Update * The ongoing elevated temperature reaction at the closed Chiquita Canyon landfill remains stable, controlled, and decelerating per objective data. EPA has expanded oversight, which management welcomes, and two critical issues have been resolved per EPA guidance. A long-term agreement with EPA is in progress, with no change to the 2026 expected free cash flow impact of $100 million to $150 million. Free cash flow impacts are expected to decline in 2027 and step down annually after that.

Guidance

- Full-year 2026 core pricing is now expected to come in at the high end of the prior 5% to 5.5% guidance range, or ~5.5%. - Full-year underlying margin expansion guidance remains 50 to 70 basis points (excluding fuel impacts), though management acknowledged the strong Q1 start creates upside potential if current trends continue. - The full-year 2026 adjusted free cash flow guidance of $1.4 billion to $1.45 billion, and full-year solid waste volume expectation of flat to down 0.5% are maintained, with Q1 weather impacts already factored into the full-year outlook. - E&P waste margin contribution is expected to remain minimal for 2026 unless sustained high crude prices drive a meaningful increase in U.S. rig counts, which has not occurred yet. - 12 total RNG projects are on track: 5 were online by end-2025, 1 came online at the end of Q1 2026 (with minimal de minimis EBITDA contribution), and the remaining 6 are expected to come online by the end of 2026 (mostly in Q4), with full EBITDA contributions starting in 2027. - The Chiquita Canyon 2026 free cash flow impact guidance of $100 million to $150 million is maintained, with impacts expected to decline in 2027 as previously guided. - Full-year 2026 capital allocation for M&A and share repurchases remains on track to meet prior expectations, with strong balance sheet flexibility.

Segment performance

Waste Connections reported total Q1 2026 revenue of $2.371 billion, up 6.4% year-over-year, with acquisition contributions (net of divestitures) of $55 million. Core solid waste organic revenue grew 3.1%, driven by 6% core pricing: 4% in the majority-exclusive Western region, over 7% in competitive markets. Total price increased 5.9% after a 10 basis point reduction from fuel/material surcharges. Total solid waste volumes were down ~1.5% year-over-year, with ~0.5 percentage point of the decline attributable to severe winter weather across most regions; the Western region saw volumes up 1.5% overall. - Landfill segment: Total tons were up 4% year-over-year: MSW tons up 5%, special waste tons up 8% (the sixth consecutive quarter of improving special waste growth, with a 20% increase in the Central region), partially offset by C&D tons down 5%. Roll-off containers were down 1% year-over-year, with rates per container up 3%. - E&P waste segment: On a like-for-like basis, revenue was up ~4% year-over-year, with higher activity and pricing in Canada and increased drilling-oriented activity in the U.S. Gulf, though no meaningful rig count increase has occurred yet. - Commodity and renewable segments: Recycled commodity revenues improved sequentially for the first time in seven quarters, led by higher old corrugated cardboard (OCC) prices that averaged $89 per ton in Q1. Landfill gas sales increased sequentially, driven by a new startup RNG facility and higher Q1 natural gas prices, with renewable energy credit values stable at ~$2.40. Adjusted EBITDA for the quarter was $769.5 million, up 8% year-over-year, representing a 32.5% margin (up 90 basis points underlying expansion, offset by 40 basis points of commodity drag).

Risks & headwinds

- Severe and unseasonable weather can create short-term volume declines and unexpected cost increases, as seen in the 2026 Q1 Northeast winter storm impacts that added $5 million in unplanned fuel costs. - Sustained high diesel prices create near-term margin dilution in Q2 2026 due to lagged recovery through fuel surcharges, even though most costs are expected to be recovered over time. - Macroeconomic volatility and geopolitical instability (such as the Iran crisis that drove a recent spike in crude and fuel prices) create uncertainty around near-term activity levels and cost trajectories. - The full implementation of New York City's new commercial waste zone franchise system has been delayed by 6 to 12 months (now expected to be completed by mid-to-late 2028) due to leadership changes at the city level, pushing back the full expected contribution from the company's 15 zone franchises. - C&D volumes have now declined for 10 consecutive quarters, and it is uncertain when they will inflect positive, even though trends are becoming less negative. - Uncertainty around the timeline and total cost of resolving the Chiquita Canyon ETLF event, though current trends are positive and costs remain within the guided range.

Analyst Q&A

• Q: Analyst asks for clarification on fuel impacts: whether fuel will be a net EBITDA wash over the full year, what margin dilution should be expected, and how much dilution will occur specifically in Q2 2026. /

  A: Almost 50% of 2026 diesel requirements are hedged, and most incremental fuel costs will be recovered over time via fuel surcharges, but the March 2026 price spike means full recovery will extend into 2027 due to lags from surcharge mechanisms and advanced monthly/quarterly customer billing. Q2 will see the most significant margin dilution because recovery starts late in the quarter, with recovery approaching full by Q3. Incremental fuel surcharges could total $60 million to $70 million through the remainder of the year, creating the expected near-term margin drag. Higher crude prices that drive increased E&P waste activity could partially offset this dilution, though that activity pickup has not yet materialized.

• Q: Analyst asks if the stronger than expected Q1 underlying margin performance increases the likelihood of upside to the full-year 50 to 70 basis point underlying margin guidance. /

  A: The strong Q1 margin performance does open the door for potential full-year upside, but management remains cautious. Most of the human capital/retention driven margin benefits have already been captured, so incremental gains will be smaller in subsequent quarters, and Q1 benefited from multiple one-off positive factors that are not expected to repeat at the same pace for the rest of the year.

• Q: Analyst asks about long-term margin expansion potential from AI initiatives after 2026. /

  A: The company has 7 AI initiatives targeted for completion by 2027, with early results exceeding expectations and most projects delivering payback in under one year. Full deployment of all 7 initiatives is expected to deliver approximately 100 basis points of cumulative margin expansion once fully rolled out by end-2027. Implementation is complex (requiring updates to routing for 15,000 trucks across 570 locations) and takes time, with the full impact not realized until all projects are deployed, but current progress is slightly ahead of schedule.

• Q: Analyst asks for an update on New York City's commercial waste franchise zone rollout, where the company holds the maximum allowed 15 zones. /

  A: The city has slowed implementation by 6 to 12 months due to recent leadership changes, pushing full completion from the original end-of-2027 target to mid-to-late 2028. The company remains the only fully integrated participant in the market with its own transfer stations and landfills to support the volume, and the opportunity remains intact despite the delay.

• Q: Analyst asks how AI-driven retention improvements impact the spread between core price and yield long-term. /

  A: AI tools reduce customer churn, which directly improves yield relative to core price by retaining more revenue from implemented price increases. Management expects the churn-driven spread between core price and yield to tighten over time as AI benefits scale, though this benefit is partially offset by reduced need for large price increases as retention improves, leading to a net positive but moderate impact on yield.