管理層發言
Hello, everyone. Thank you for joining us, and welcome to the Waste Connections, Inc. Q2 2026 Earnings Call. The operator will provide instructions. I will now hand the call over to Ron Mittelstaedt, President and CEO. Ron, please go ahead.
Okay. Thank you, operator, and good morning, everyone. I'd like to welcome everyone to this conference call to discuss our second quarter results and increased outlook for 2026. I'm joined this morning by members of our senior management team, including our CFO, Mary Anne Whitney, who will first provide our forward-looking disclaimer and 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 uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement in our July 22 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 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 Ron.
Okay. Thank you, Mary Anne. We are extremely pleased by the strength of our first half performance, which positioned us for an increase to our full year 2026 outlook with momentum for upside from improving trends in commodities and ongoing acquisition activity. Q2 growth of over 6% in both revenue and EBITDA exceeded our expectations in spite of the macroeconomic effects related to ongoing uncertainty in the geopolitical environment. Our results reflect continued benefits from both multiyear improvements in employee retention and record safety performance and more recent investments in AI technology, all underpinned by disciplined operational execution. Most notably, adjusted EBITDA margin expanded to 32.8% on a 70 basis points of underlying margin expansion, overcoming cost pressures primarily from rapidly spiking fuel and related costs in addition to ongoing drags from lower commodity values compared to last year's Q2. Solid waste organic growth from total price of 6.7% in Q2 included core pricing of 5.6% plus fuel and material surcharges of 1.1%, which outpaced our expectations. On average yield of 4.6%, volumes were down 1.9% reflecting the ongoing macroeconomic uncertainty, which has limited growth in solid waste activity. Further, recent elevated fuel costs have impacted the pace and magnitude of construction-related activity, some of which was paused during Q2. In addition, customer sensitivity to higher overall pricing resulting from fuel-related surcharges likely exacerbated churn in certain markets. Acknowledging these dynamics, while special waste tons were down year-over-year in Q2, we have been impressed by activity in July, which may be an indication that the slowdown was temporary. Additionally, we were encouraged to see C&D tons up year-over-year in Q2 for the first time in 10 quarters, with some projects continuing thus far in Q3. Looking at other lines of business, we saw a slightly elevated seasonal ramp in E&P waste revenue in Q2, up 12% from Q1 and up 18% year-over-year. Organic E&P waste growth was led by the U.S., up 7%, following a nominal pickup in rig count. Activity in Canada, while more production-oriented and therefore less sensitive to crude values, was down nominally but about flat year-over-year when normalized for an outsized remediation project in the prior year. Looking next at trends for other commodities in Q2: recycled commodity revenues stepped up sequentially for the second consecutive quarter with the overall basket up 10% to 15% from year-end. Landfill gas sales have also improved, stepping up sequentially by 15% from Q1 as a result of both higher gas generation and higher values for renewable energy credits, or RINs. Looking at our renewable natural gas projects, we're pleased to report progress ahead of our expectations on the remaining development projects in 2026. Coming into the year with about one-third of our RNG portfolio already operational, we have completed start-up and ramp production at several other projects, including one owned facility brought online in July. RNG capital outlays are on track to be essentially complete by year-end, and we expect that all plants will be operational by early next year. We're also tracking in line with our expectations with respect to the impact from managing the elevated temperature landfill event at Chiquita Canyon landfill. As we described last quarter, we continue to make progress mitigating the reaction, which is stable, controlled and decelerating. There is no change to our projections regarding related free cash flow impacts to 2026 or our expectations for sequential decline in impact in '27. Moving next to M&A: as expected, year-to-date, we have completed acquisitions totaling approximately $100 million in annualized revenue, and we have another $30 million of exclusive market franchise transactions anticipated to close very soon during Q3. With almost half the year still ahead of us and dialogue ongoing, we remain on pace for what we would call another above-average M&A year. We've also remained active buying back our own shares in what we consider an opportunistic environment. In our busiest year ever, we've deployed approximately $692 million year-to-date and bought back over 1.5% of shares outstanding pursuant to our normal course issuer bid, which authorizes the repurchase of up to 5% of shares annually and which we will renew in August. Following an active first half of the year, our leverage remained virtually unchanged at 2.76x debt-to-EBITDA. As such, we retain flexibility for acquisitions and returning capital to shareholders through additional repurchases as well as another increase to our dividend, which we will consider when we undertake our annual review in October. And now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter, to review the elements of our increased full year 2026 outlook and what that implies for the back half of the year. I will then wrap up before heading into Q&A.
Thank you, Ron. In the second quarter, revenue of $2.562 billion exceeded our expectations and was up $155 million or 6.4% year-over-year. Contributions from acquisitions net of divestitures totaled $46 million in the quarter. Organic growth in solid waste collection, transfer and disposal was led by 5.6% core price, which ranges from about 4% in our mostly exclusive-market Western region to 7% in our competitive regions. Total price of 6.7% included 1.1% in fuel and material surcharges or approximately $25 million which represents the majority of the incremental direct costs in the quarter. We remain on track for full year core price at or above 5.5%, with pricing for 2026 largely complete or otherwise known, and expect to fully recover higher fuel costs over time through surcharges with the timing determined by the pace and magnitude of changes in diesel pricing. Yields of 4.6% were consistent with Q1 levels and continue to reflect the benefits from our AI price optimization tool deployed late last year. Solid waste volumes were down about 1.9% reflecting the following year-over-year results in the second quarter on a same-store basis. Roll-off pulls were down 2%, similar to recent quarters, with rates per pull up 5%, which is about 150 basis points higher than in the past several quarters, primarily resulting from surcharges. With the exception of our Western region, pulls were down in all regions on sluggish construction activity and likely reflect some price-volume trade-off following increased surcharge activity, a trade-off we're comfortable taking. Landfill tons were essentially flat, reflecting flat MSW and special waste down nominally on tough comparisons, with C&D tons up 1% halting the downward trends we've noted and led by a 10% increase in our Central region, where we highlighted strong special waste activity in Q1. Adjusted EBITDA for Q2, as reconciled in our earnings release, was $840.1 million, up 6.8% year-over-year. At 32.8% of revenue, our adjusted EBITDA margin exceeded our expectations and was up 10 basis points year-over-year, driven by 70 basis points underlying margin expansion offset by about a 40 basis points drag from fuel and another 20 basis points drag from lower commodity values. Our outsized underlying solid waste margin expansion reflected favorable price/cost spread dynamics in spite of additional cost pressures indirectly related to fuel and was magnified by benefits from employee retention and safety, most notably savings in risk management costs, which accounted for about half of our underlying margin expansion. And finally, year-to-date adjusted free cash flow of $703 million was in line with our expectations and consistent with our full year 2026 outlook for double-digit growth in adjusted free cash flow per share. Year-to-date capital expenditures of approximately $600 million, up more than $100 million year-over-year, were also in line with our expectations. CapEx outlays to date are following a more normalized cadence than last year when the pace of spending reflected slower progress on RNG projects and delayed fleet deliveries. I will now review our updated outlook for the full year 2026 and provide some thoughts about what that implies for the back half of the year. 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 change in the 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. Looking first at our updated outlook for the full year, as provided for and reconciled in our earnings release: Given the strength of our performance in the first half of the year and updating for recent values for recycled commodities, RINs and fuel as well as acquisitions completed to date, we are increasing our full year 2026 outlook as provided in February as follows: Revenue is now estimated in the range of $10.02 billion to $10.05 billion, up $100 million to $120 million from February. Adjusted EBITDA for the full year is now estimated in the range of $3.33 billion to $3.34 billion, up from a range of $3.30 billion to $3.325 billion, putting full year margin in the range of 33.2% to 33.3%. As Ron noted, there is no change to our expectations for adjusted free cash flow for 2026 in the range of $1.4 billion to $1.45 billion, including impacts related to closure at Chiquita Canyon landfill in the range of $100 million to $150 million and capital expenditures of $1.25 billion. The closing of additional acquisitions would provide upside to our increased 2026 outlook as would further improvement in commodities and related activity. Further movement in fuel prices and the timing of recovery of higher fuel costs will also continue to impact results. Looking next at the quarterly margin cadence: Adjusted EBITDA margin in the second half of the year is expected to average about 33.7% as implied by our full year outlook and could exceed 34% in Q3 depending on fuel and other commodities in the quarter. As noted earlier this year, the toughest quarterly comparisons will be during Q4 when we would expect a more typical seasonal step down in margin than we experienced in 2025. And now let me turn the call back over to Ron for some final remarks before Q&A.
Thank you, Mary Anne. As we have said, we're extremely pleased with our first half results and our increased outlook for the year. We believe the most challenging quarter for fuel recovery is behind us, and we see potential upside ahead from improving commodity-related trends and incremental acquisitions. Along with the benefits we've enjoyed from improved employee retention and record safety performance, we've already seen the potential to unlock opportunities in AI-driven projects impacting our operations. And we're reaching the inflection point on the outlays impacting our free cash flow conversion, most notably our RNG facilities moving from a CapEx headwind this year to a tailwind from contributions from operations next year along with a continued decline in cash closure outflows at Chiquita Canyon landfill. In short, we're set up for double-digit adjusted free cash flow per share growth in 2026 and already looking ahead for more of the same in 2027. The consistency and projectability of our industry-leading results despite the macroeconomic backdrop reflects our differentiated approach and is ultimately a testament to operational excellence and fundamentals that define us. Safety, integrity and customer service all make Waste Connections a great place to work. And we are most grateful for the dedication of our 25,000-plus employees, which is what truly sets us apart. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions. Operator?
分析師問答
Your first question comes from the line of Tyler Brown with Raymond James.
Ron, I want to maybe pack a couple of questions into one. But first, I just want to kind of come back to the competitive landscape. So I'm just curious, is the move in fuel causing some increases in churn? And what I mean by that are the smaller haulers who maybe don't have sophisticated surcharge mechanisms using your move-in surcharges maybe as a pathway into new customers? And is that, frankly, different than what you've seen in the past? Or is there any bigger changes in the competitive landscape? And then two, Mary Anne, just what is the rollover impact from M&A in '26? And would there be any lingering left over in '27 based on what's closed?
So, Patrick, I'll take the first part. Number one, I would say that we're not seeing anything different than historical with regard to fuel surcharges and churn activity. There's probably some nominal increase in the competitive activity because of the pace of this increase in fuel. We went from $60 to over $120 a barrel in a very short period of time — a time that would typically take six to eight months took four to six weeks. The public companies reacted very quickly, as I think you see and will see. Private companies were slower. They'll take three to nine months and absorb it and use that as some competitive inroad. So I would say it's just that this was such a fast spike that it probably makes it look a little different. The longer this wears on, the less difference between those public and private companies will be. So it's not anything material, but it probably accounted for an additional 10 to 15 basis points of volume churn in the quarter related to that.
And then in response to the second question, even though you're violating the rules, Patrick, I'll be brief. Acquisition contribution, the rollover contribution to next year would be about $30 million. The increase to our full year outlook included an increase of about $50 million associated with '26.
Your next question comes from the line of Kevin Chiang with CIBC.
Just one on — we're hearing a lot more on in Canada, nation-building projects and more energy infrastructure projects. And I guess when I think of your R360 Canada operations, just how you think that might benefit from this increased capex? And maybe how many auto facilities do you have today that maybe could be reopened if activity does pick up in Western Canada here?
Sure. Well, Kevin, to the second part of your question first, there's still two to three idle facilities that can be reopened of the original five from when we acquired the divested assets up there in February 2024. So that would be the first part. There's a lot of discussion, as you know, in Canada of increased energy production, various export pipeline construction throughout the country. Obviously, we think we're extremely well positioned to benefit from that if and when it happens from all the operations that we've got there. But we have not yet seen that. As we said in our comments, Canada was relatively flat but coming off a very strong comp in Q2 of last year.
Your next question comes from the line of Faiza Alwy with Deutsche Bank.
Ron, you made some comments around the macro environment and the fact that you've been impressed with activity in July indicating that the slowdown is temporary. So maybe talk a little bit more about that. Did you see a broad-based pickup? Did the competitive environment improve? Just give us a little more perspective on what you saw differently in July versus what you saw in Q2?
Yes. Well, first off, Faiza, I don't want to overgeneralize. We have about three weeks of July so far. But we have seen some continued pickup in both special waste and in several of our regions of C&D. MSW has been up nominally so far for the last four consecutive weeks, which is an improvement relative to the May/June time frame. Some of that can be timing — it's hard to understand. As you're hearing from other industrial service providers and equipment providers, there does seem to be an accelerating pickup in rental equipment and construction-related equipment demand and activity, which would indicate that that is coming. We tend to lag because it takes time for that to start generating waste. We're cautiously optimistic, but we have not baked any of that into our guidance that was just provided for the second half of the year.
Your next question comes from the line of Jim Schumm with TD Cowen.
Could you just help me with the Chiquita accounting. You had a $58 million impairment there. Is that — like I thought Q1 was sort of a true-up. And then — so is that impairment reflective of the Q2 spend? And could you just give us an update on where you are in the Chiquita spend year-to-date versus your guidance?
Okay. So I'd be happy to take that, Jim. So first off, no, that is not indicative of the Q2 spend. What this is, is the matching of the closure accrual liability to the projected run-rate cash flow outflows. So as we move along, we true that up, but there is no change at all to our $100 million to $150 million of cash outflows in 2026 and the stepping down of those in '27 and again into '28. This is purely the matching of the liability to the run rate. It's the difference between cash and GAAP accrual accounting.
Got it. Okay. And Ron, would you be able to say where you're tracking year-to-date versus the $100 million to $150 million guidance?
Well, we're tracking probably somewhere between the middle — $125 million and $150 million at this point in time, but comfortable in that range for the full year.
Your next question comes from the line of Konark Gupta with Scotiabank.
Mary Anne, just wanted to dig into the underlying margin trends for you guys. I understand obviously the comps are changing every quarter. But just seeing this trend where your underlying margin, I think, expanded about 150 basis points in Q4 of last year, and then we saw 110 in Q1, now 70 in Q2. Is this deceleration in underlying margin expansion purely on the comps? Or is there something else we should be thinking about as well as we look into the second half?
Sure. It really is about comps and what we've communicated with respect to the benefits from the employee retention and safety-related margin drivers. We said there would be about 100 basis points, and then we came back around and said it's probably even north of that. The final piece would be the risk component, which would lag and you've now seen three quarters of 30 to 40 basis points benefit from risk. In addition, you saw the benefits from internalization — last year, we talked about the benefits at Arrowhead, for instance, where we were internalizing more tons than our disposal costs were going down. So it really is just that we are now lapping or anniversary-ing those — and as you point out, Q4 was notable because you had such a large benefit just from disposal and risk in Q4 last year. That's why when we described the more typical step down, it really is with seasonality, and that will impact Q4 as we expected when we gave our guidance at the beginning of this year. We're just reminding folks of that sequential decline that you'll see.
And also last year in Q4, you anniversary-ed the closure of the Chiquita landfill. So that was a sequential step as well. So again, it is just comps, as Mary Anne said.
Your next question comes from the line of Toni Kaplan with Morgan Stanley.
I was hoping you could talk about free cash flow and the investments that you're making into fleet and landfills, RNG and also whether the Chiquita outlays are relatively straight-line across the quarters or if there's more seasonality in some of the quarters versus others?
I would say, first of all, with respect to the second part, I wouldn't place too much emphasis on exactly what outlays are in a given quarter; it can be lumpy for a variety of reasons. For modeling purposes, it's probably fine to do it kind of straight-line with respect to the Chiquita piece. More broadly, to your question about CapEx: as we noted in our prepared remarks, our spending is in line with our expectations in terms of CapEx. We just pointed out that it's up year-over-year largely because of delays last year. It's ordinary course where you'd expect us to be investing in fleet and building out our landfills, which are the bulk of CapEx in any given year. Beyond that, RNG, which you asked about, we've mentioned that there were $75 million in RNG capital expected this year and the update is we expect to spend that amount. Therefore, we expect that what's left on RNG in '27 would be de minimis. We're essentially done with those CapEx outlays that we've talked about over a multiyear period. It is one of the drivers for the inflection in free cash flow in '27: the absence of continued CapEx in RNG and the benefits from those projects coming online. We've already started to see this year which we factored some of that into our expectations coming into the year, and it's exceeded that, which is, again, one of the other drivers for the pickup in EBITDA from our previous guidance.
And Toni, I would just add that you're always going to have in Q2 and Q3 your landfill construction projects and facility construction project capital because you cannot do that in the winter months. So we put more truck purchases in the first, second and beginning of the third quarter to offset and manage that flow more evenly and to get the trucks delivered early in the year to our field to impact the P&L in variable and safety. So that's sort of how we think through how CapEx flows.
Your next question comes from the line of Bryan Burgmeier with Citi.
Just on the updated outlook for 2026. I was just wondering if you can maybe frame your expectations for cost inflation just for wages, maintenance repair, other items. Just maybe what do you expect now versus the original guide in February? Just kind of thinking about that net price-driven margin expansion and how we should be modeling that in the second half?
Sure. The observation I'd make: first of all, in our guidance, we've maintained the underlying solid waste margin expansion in the range of 50 to 70 basis points. There's no change to that expectation. Really all that changed is we're acknowledging that fuel is a little more punitive than we knew coming in in February; it's down 20 to 30 basis points. Commodities are offsetting a portion of that because they've improved. What that tells you about the underlying margin expansion is that we're actually outperforming our original expectations because we'd acknowledged that there's cost creep in a number of areas indirectly related to fuel — anything that's being delivered to us is more expensive than it was before you saw that spike in fuel. Broadly speaking, we came into the year thinking that cost pressures are kind of in that 3.5% to 4% range. The primary driver, of course, is wages, but these other pressures have crept a little. Wages have behaved in line with our expectations and are moderating slightly as we move through the year.
Your next question comes from the line of Jerry Revich with Wells Fargo.
This is Andrew Azzi on for Jerry. I just wanted to start off maybe with if we could outline some of the AI initiatives that are running through '27. Would you be able to walk us through where each of the initiatives are kind of sitting in their life cycle now and the EBITDA contribution captured to date?
Yes. I'll take them in some broad buckets. In '25, we fully deployed our AI-linked pricing tool, and that was fully deployed by the fourth quarter of '25 and has yielded about $20 million of EBITDA improvement on a run-rate basis through '26. We are putting in a dynamic, real-time AI-driven algorithm for routing and began pilot testing that in late Q2 of '26; it is not set to be fully deployed until the end of '27, so it's not impactful to the P&L until '28. As we go through '28 and '29, we expect roughly $40 million to $50 million of route-related savings from that initiative. We are beginning at the end of Q3 and into Q4 of this year some AI technology in our customer service approach and a mobile application for customers, particularly residential customers. That will not be deployed until the second quarter of '27 and will be fully deployed in the early-to-mid part of '28. We're expecting probably somewhere in that $20 million to $35 million initial EBITDA impact. We're investing about $100 million in AI-related technologies across seven programs, and we expect about $100 million, or about 100 basis points, of improvement in EBITDA as we come through '28 into '29.
I really appreciate all the quantitative breakout. That's great to hear. I guess, secondly, on special waste tons. We've seen a lot of improvement as of late. Can you talk about some of the verticals that are driving that strength? And how you think about the durability of the contribution to both volume and margin into '27?
What I'd say is that we mentioned last quarter that we saw a pickup in special waste. We mentioned this quarter that there was actually a slowdown, which is a reminder that it can be lumpy, and that perhaps the spike in fuel put a little pause on some projects, but the demand is out there and ultimately it will come to market. Keep in mind that it's a very small piece — a couple of points of revenue is what special waste is — but it's more about the indication of the underlying economy and the fact that there's some cyclical growth, which we just really haven't seen. Similarly, C&D tons were positive for the first time in a couple of years, and that's encouraging. It's not a surprise that it's in our Central region where we saw high special waste in Q1, which should be an indicator of construction and demolition debris in subsequent periods.
Your next question comes from the line of Chris Murray with ATB Cormark Capital Markets.
Maybe just taking a stab and thinking about cash flow conversion as we go into 2027. And you've referenced the fact that you've got some normalized spending coming lower RNG, maybe Chiquita rolls off. How should we be thinking about between the margin improvement that will develop and some of these things coming off? How do we think about the cash flow conversion? Is there anything unusual to be thinking about as we start entering that period?
Chris, it's early days to be talking with specificity about '27; we'll look forward to giving guidance. But what we know now is that we have visibility on the RNG spend, and that's $75 million. That informs our thinking. We also have reiterated that the Chiquita outlays will be less in '27 than they were in '26. Those two pieces on their own certainly take us north of the 41% to 42% free cash flow conversion you see in the current period and get us more in the direction of where we'd expect to land, which would be in that 48% to 50% range, which is historically where we've been. In some periods we've been as high as 52% or 53%, but we would encourage people to think of more normalized being 48% to 50%.
Okay. And so there's no real expectation for special spend or anything like that. In fact, it feels like '27 is shaping up to be the first of a normal year and maybe a few in a row; is that the right way to think about it?
That's fair. We've mentioned the AI spend continues; again, that's not a big number but ongoing. The lumpier piece, which was specifically RNG, is behind us.
Your next question comes from the line of Trevor Romeo with William Blair.
I just had one on PFAS. I think there was a recent announcement about a new treatment facility you're working on at one of your landfills in North Carolina. I think you have a few other treatment plants at other landfills. How are you thinking about being proactive and getting ahead of regulations versus being reactive? And can you just talk about the economics of building an on-site treatment plant versus sending leachate elsewhere and the return on that capital?
Yes. Trevor, the opening of a treatment plant in the Carolinas that we talked about is an example of being proactive. It responds to rising leachate costs at POTWs related to PFAS and other requirements being imposed by state and federal regulators. Knowing that, we have been deploying multiple mobile, relatively inexpensive technologies for four to five years that depend on the technology used; they essentially separate PFAS and solidify it through a foam fractionation process allowing us to ultimately bury it in the landfill and clean the leachate to a point of acceptable discharge. These are internal projects. We are not broadly marketing third-party treatment services, but we will send leachate from surrounding landfills to a hub site where we have capacity. It's ultimately a hedge against rapidly rising leachate treatment costs at POTWs that is going on everywhere. We recognized this many years ago and started investigating, investing and deploying these technologies. We have them at several of our sites, and you'll see them continue at several more. It's a normal course of CapEx at this point in time for us, and they reduce treatment cost relative to third-party options quite significantly.
Your next question comes from the line of Saba Khan with RBC Capital Markets.
This is Bhaven on for Saba. My question was more related to M&A activity. You already noted that you're going to have an outsized year. Can you talk a little bit about the type of assets that are in your pipeline, what's in the market today and what the cadence is for the back half of the year?
Sure. The cadence will be determined by seller timing and consents and typical closing procedures. We've already talked about an additional $30 million that we'll be closing over the next few weeks of exclusive franchises; there will be additional closings throughout Q3 and a normal run of closings in Q4 getting us north of what we call an outsized year. These are typical Waste Connections singles and doubles in solid waste. There may be one or two small E&P deals in either Canada or the U.S., but these are traditional solid waste deals: collection, transfer, processing and in some cases disposal. They are in both our competitive and exclusive footprints. So nothing abnormal in the pipeline for the balance of this year or in the foreseeable future.
Your next question comes from the line of Tobey Sommer with Truist.
I wanted to get your perspective on rail opportunities and how that integrates into the network. You've got experience in that arena. I wanted to get your nearer-term and longer-term perspectives for how much that is going to grow as a component of your business?
Sure. Rail today is fairly geographic-centric and is used predominantly off the upper northeastern seaboard due to limitations of landfill capacity and the economics of higher tip fees in that region. We've grown our Arrowhead landfill rail network over the last two years by effectively 300%, and all of that is moving off the eastern seaboard through our intermodal facilities, and we'll continue to grow that. We began a rail project in the Southeast specific to Florida related to disposal and incineration issues in Miami-Dade County; we and one of our public peers have been awarded long-term agreements to take volumes north of Miami into central Florida on rail at our landfills. We began that in mid-to-late Q2 and it is starting to ramp in Q3. It will continue throughout the balance of the year as operations smooth and customers receive more railcars. Rail is an opportunity now in the lower Southeast due to a unique situation. You don't really see it as an opportunity in many other geographies today, except that in the Pacific Northwest about one-third of waste moves via rail and that will continue. This will not be an enormous portion of our business, but it is a small portion that is growing nicely.
Your next question comes from the line of Aadit Shrestha with Stifel.
Just on the core pricing yield spread: I think that improved again like roughly 30 basis points from Q1. Q1 was around 130 basis points, this quarter around 100 basis points. I understand there could be a mix factor impacting that. Could you talk about the spread going forward, if this is a reasonable expectation? And what makes your business unique that the spread is so much different than some of your peers, who usually report closer to 200 basis points?
With respect to the sequential differences, I would attribute those to mix. The difference between core price and yield will be mix by line of business and by geography — dramatically different wins and losses in different markets, for instance in the Eastern part of the country versus the Southeast. The other point is churn, which we said is an impact; I wouldn't encourage you to think that something materially improved in Q2 versus Q1. In fact, we pointed out that we think the increase in fuel surcharges probably increased or exacerbated churn in the business. I can't speak to our peers and what they see in their business. We would remind folks that our strategy is purposeful in thinking about the competitive intensity of markets and the ability to retain price. You would expect, as historically, that that impacts how much price we keep, which is what you see in yields.
Your next question comes from the line of Christina Bettink with BNP Paribas.
This is Christina on for Seth Weber. Could you update us on the Seneca Meadows expansion that was filed earlier this month? Where do you see the permitting timeline from here? And how are you managing airspace and volumes at this site in the meantime, whether by rail or truck?
Sure. To the second part first, we are managing airspace to make certain we have adequate airspace for external and internal customers until we can get the expansion permit and construct the first expansion airspace. We're doing that both by rail and truck. We're moving some of our volumes out of Seneca by rail through our network to Arrowhead and elsewhere to help manage those timelines. Most volume into Seneca is by truck. The process is moving along well. We've had some very important recent legal and regulatory rulings in our favor — in fact, all of them at this point — and we feel very good about it. We're still working through a state technical process on the permit and would expect resolution relatively soon, but you're probably looking closer to the end of this year for final achievement of the permit, which is our current expectation. This is a technical and somewhat political process, but the vast majority of the political and legal process is behind us at this point.
Your next question comes from the line of Jon Windham with UBS.
Nice result, nice raise on the guidance. My question is around interest rates. The 10-year has been trending upwards. Historically, a rising interest rate environment enhances your funding advantage compared to private players, which could be helpful for pricing and M&A. What are your thoughts on the impact of a rising rate environment?
Jon, I wouldn't disagree that we're well positioned with respect to our balance sheet and access to low-cost capital. We do think it is a differentiator. Certainly, as between public and private, privates are more impacted when rates rise, so I would agree with that — it is a competitive advantage to us. The other factor is what interest rates do to the more cyclical component of the business: interest rates can discourage growth and development, which leads to less volume. So it's a double-edged sword.
Yes. Jon, you're accurate. There are at least three factors outside our control that affect external M&A from private companies. Rising interest rates help, but for reasons different than you might think. First, they help because sellers perceive they can take their after-tax proceeds and reinvest in low-volatility investments and derive the same or better lifestyle than taking it from their company — they couldn't do that in a low-rate environment. Second, rising rates and higher tax rates can accelerate sellers' decisions. And third, the macro economy matters: sellers want to sell in a rising macro environment when they believe their business has full value. Those are the ways rates affect M&A.
Your next question comes from the line of Noah Kaye with Oppenheimer & Co.
Ron, Mary Anne, Joe and team. Just going back to capital allocation: You spent, I think, $51 million on undeveloped land near your existing facilities — that's the first time in six years. Anything strategic associated with that that you could help us understand, like landfill expansion or something else? And then the follow-on was just the incremental RNG contribution next year since you're already pacing ahead of your expectations for this year?
Sure. On the undeveloped land: no, that is strategic and opportunistic. Episodically, we have the opportunity to buy something for future development. In this case, it's future development for facilities in a Florida market that's been growing as a result of acquisition and other impacts. It's an expensive real estate market with limited opportunities, so that's what you saw in the $51 million purchase. With respect to RNG, we've talked about a $100 million to $150 million contribution bucketed across years and we're about two-thirds of the way through this year. We are seeing about $15 million to $20 million more in contribution from RNG this year than factored into our prior guidance. That leaves a final third next year, and I would expect a bit better margin contribution next year because we're absorbing a lot of the start-up costs this year, so it will be less impactful from a margin standpoint next year.
Your next question comes from the line of Stephanie Moore with Jefferies.
Sorry about that — I was muted and my headphones died. One question I think people keep asking is on underlying volume performance. There are many moving pieces: the overall health of the economy, the industrial economy and also industry actions about which types of volumes to pursue. How should we think about underlying volume growth of the industry over the next several years?
There's a lot in that question. Historically, only two things affect underlying volume growth when you strip out mix: GDP (specifically nonfederal government spending) and population growth. Right now, population growth is effectively zero, and Q2 non-government spending was about 1.3%. So you can't be much better than roughly 1% total volume growth in this environment with flat or negative population growth. If you look at our Western region, which is 100% exclusive and where we get every drop of waste in our franchise, we had 1% volume growth in Q1 — about as good as it gets in this environment. Last year that region ran between 2% and 3.5%. The public companies have been consistent on price/cost spread and not pursuing all volumes; many private companies thrive on lower-margin segments (5% to 10% EBITDA margin), like certain residential or HOA contracts, which public companies generally don't pursue. So volumes industry-wide will be somewhat flat to negative unless there's a macro change. If margins are moving up and volumes are nominally negative, that's acceptable. If margins are moving backward while volumes are negative, that's problematic — that's not where we're at. Not all EBITDA or volumes are created equally, and we don't want all volumes.
There are no further questions at this time. I will now turn the call back to Ron Mittelstaedt for closing remarks.
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 able to cover under Regulation FD, Regulation G and applicable securities laws in Canada. Thank you again, and we look forward to connecting with you at an upcoming investor conference or on our next earnings call.
This concludes today's call. Thank you for attending. You may now disconnect.