Ed Egl:

Thank you, Livia. Good morning, everyone, and thank you for joining us for our second quarter 2024 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer, John Morris, Executive Vice President and Chief Operating Officer, and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8K that includes the earnings press release and is available on our website at www.wm.com. In addition, we have published a supplemental presentation with additional information elaborating on the strategic rationale for the company's planned acquisition of Stericycle. The supplemental presentation is available on our website at investors.wm.com and as an exhibit to the Form 8K. The Form 8K, the press release, and the schedule for the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10K and Form 10Qs. John will discuss our results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the prior year. Net income, EPS, income from operations and margin, operating EBITDA and margin, and SG&A expense and margin results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow or non-GAAP measures, please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com, for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day, beginning approximately 1 p.m. Eastern time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on July 25, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I'll turn the call over to WM's President and CEO, Jim Fish.

John Morris:

Thanks, Jim. And good morning. We're pleased with our second quarter results, particularly our ongoing optimization of operating costs. Our teams remain intently focused on delivering safe and reliable service to our customers, and I want to thank them for their dedication, especially those in areas impacted by Hurricane Beryl in early July. Second quarter operating expenses is a percentage of revenue improved by 130 basis points year-over-year to 60.9%. This improvement is a testament to our disciplined management of operating costs and our collection lines of business. Combining our strong operating expense performance with disciplined pricing, we significantly enhanced overall operating EBITDA margins. In the second quarter, operating EBITDA in our collection and disposal business grew by $203 million, with margin expanding to 37.3%. Our continued adoption of technology and automation was a key driver of these significant operating cost improvements. Specifically, in labor, the use of scheduling and planning tools, advanced mapping technology, expansion of our dynamic routing capabilities, and automation of our residential fleet resulted in improved efficiency across all three of our collection lines of business for the second consecutive quarter. In residential, efficiency improved by nearly 6% in Q2, largely due to fleet automation. Our automated routes achieved over 30% efficiency improvement, contributing to a significant increase in residential operating EBITDA margin when compared to last year. Additionally, our people-first focus led to reduced driver turnover, which improved 300 basis points from a year ago. Company-wide, the integration of technology and improved driver retention contributed to a 90 basis point reduction in labor costs as a percentage of revenue. We remain confident in the value of our technology and optimization efforts, and we expect to continue driving labor cost improvements throughout the year. Turning other operating costs, repair and maintenance spending as a percentage of revenue improved by 20 basis points, reflecting our continued adoption of technology-enabled processes and an improving truck delivery schedule. Lower fuel costs also contributed 20 basis point improvement to operating expenses as a percentage of revenue. We remain committed to optimizing our cost structure to meet both operational and financial objectives, and we're proud of the results we have achieved so far. And finally, turning to revenue growth, our customer lifetime value model continued to drive organic revenue growth from price in line with our full year expectations. Our pricing results relative to plan remain on track, reflecting our team's focus on using customer-specific data and insights to deliver price increases that keep pace with inflation and margin expansion objectives. Churn remains at 9%, and service increases continue to outpace decreases, further reinforcing our execution. On the volume front, trends in commercial collection, MSW, and special waste remain strong in the quarter and are generally aligned with expectations. As are C&D landfill volumes when adjusted for the lapping of volumes related to Hurricane Ian cleanup last year. However, volume in our roll-off line of business is one area where we continue to see a bit of softness. Similar to last quarter, we continue to see moderation in both a temporary business driven by home building, as well as a portion of our permanent roll-off business in the industrial segment. While a few segments of our collection volume are trending a bit behind our full year expectations, our discipline revenue management combined with our strong execution on cost optimization continue to give us ample confidence that we are positioned to deliver strong financial performance throughout the rest of the year. In closing, I want to thank the entire WM team again for their contributions. Their performance so far in 2024 sets us up for continued success. I'll now turn the call over to Devina to discuss our second quarter financial results in further detail.

Operator:

Certainly. [Operator Instructions]. And our first question coming from the line of Tyler Brown from Raymond James.

Devina Rankin :

Good morning.

Devina Rankin :

So, I'll start by highlighting that the one item that was different than our expectations at the end of April when we spoke about that little north of 30% for Q2 is the risk management impact of 50 basis points in the quarter. So, if we had not had that item, which we couldn't have predicted, we would have come in at or above the target that I provided on the call last time. What I would say about when we look forward to Q3, what's changed a little bit, there's a couple of things. One is recycled commodity prices, and you guys know that we have a different geography than our competitors do with regard to the impact of recycled commodity prices. And that was a 40 basis point headwind in the quarter, and we expect elevated commodity prices to continue into the back half of the year. So, there is a little bit of a headwind that we weren't projecting from recycling brokerage in particular that would carry over. And then, in addition to that, with lower industrial volumes that John mentioned, the flow through on industrial volumes is generally strong 40% levels. And so, that again is one of the things that created a headwind in the quarter and that would impact Q3. The third item relates to the Tuck-In acquisition contributions. As you know, based on where we are in integration processes, integrated M&A revenue and activity tends to come in in early innings at a lower contribution margin than our base business. So, what I would say is that right now our Q3 outlook is in the range of 30.5% to 31% with all those things taken into account.

John Morris :

Yeah, Tyler, it's John. Good question. I mean, if you look at what we did in Q2, it was about $77 million of revenue that was acquired. The $750 that we put, that we've all talked about, represents about $300 million of acquired revenue by the end of the year. So, hopefully that clarifies a little bit. And then, what Devina and I talked about is there is some benefit we've talked about in the back half of the year, that $25-ish million that will be a contribution from some of the M&A we've referenced.

Jim Fish:

So, Tyler, Jim here, let me just give you a little bit of extra color here. The 25 that Devina referenced in kind of our forecast over the revised guidance number of 6,450 that we gave last quarter, that 25 has some of what John talked about, which is the Winter Bros acquisition. We'll get five months-ish of that. We already had baked into our original guidance some M&A EBITDA and revenue, but can't say we baked in Winter Bros. So, you're going to get part of that. You're going to get, as Devina said, you're going to get some of the sustainability stuff, which, by the way, is working both ways for us. I mean, we get some commodity pickup. We also are seeing a few minor delays in a couple of the R&G plants. We're still building five R&G plants for the year, as we said we would, but 30 days or so of delay is impacting us. So, all of that adds up to the 25. I think Devina's point, though, is really worth really reiterating here. I mean, you're talking about almost 10% EBITDA growth, and to some degree, I feel like we have a great story to tell, and sometimes we aren't great storytellers, because I feel like we've got 10%, which is the strongest EBITDA growth, probably back to the 1990s. I'm sure the company grew by more than 10% in 1982, but since the 1990s, that's the strongest EBITDA growth we've ever seen, and yet we're doing it. You remember in 2019, when we said we grew EBITDA between 5% and 7%, we said, at the top end of the range, that's going to be in a really robust economy, where we're seeing, you know, 2-plus percent volume growth. We're not seeing 2-plus percent volume growth. We're flat on volume, and yet, in an economy that's kind of stumbling along, honestly, and yet we're growing EBITDA by 10%. Almost all of that, except for that $25 million-ish or whatever that number is for us, almost all that's coming from organic growth. Same with last year. We grew by 7% last year, and it was almost all organic growth. It's coming from those things that we've talked about in the past. You know, you remember a couple years ago, we started talking about technology, probably five years ago. We're going to talk, we're going to bring technology to bear, and we're going to really make a commitment to sustainability, and we're going to put operating processes in place, improve efficiencies, we're going to get smarter with pricing through data analytics, all that stuff, and I remember on the earnings call getting questions like, okay, that's great, Jim. When are we going to see the impact on the bottom line? You are seeing the impact on the bottom line. When you see 10% EBITDA growth, 160 basis points of margin growth, and still 5-ish percent revenue growth, it's all coming from price, you are absolutely seeing that kind of strategic growth, and then at the same time, we're doing some acquisitions. I mentioned in my script where we're filling holes, either where we weren't before, or adding to really strong strategic positions like Texas, like Florida, like North Carolina, Tennessee, you could go down the list, Arizona, and then you've all seen a deck on Stericycle. I mean, Stericycle is basically a fourth line of business for us. We've got resi, we've got commercial, we've got industrial, now we've got medical. And with Stericycle comes significant opportunities for synergy and comes with a higher growth trajectory in medical waste than in the solid waste space. So we're very excited about that, which basically gets me to a 25 number, and 2025 we'll give you guidance in February. But I could not be more bullish when I think about 2025, when you add all those things up. I mean, think about these sustainability investments. Tara will tell you we've spent probably three-quarters of the capital, or we will have by the end of the year, and we will have only realized 15% of the EBITDA. So 2025, I don't care who gets elected in November. Well, I do, but it doesn't matter who gets elected in November. And it doesn't matter whether we have geopolitical problems. It doesn't matter whether the economy is up or down. We're going to have a blockbuster year in 2025. We'll talk about it in February. But that's on top of what we consider to be a blockbuster year this year. So a bit longer answer than I think you were bargaining for when you got on when you were first in the queue. But I just want to make sure everybody understands all that.

Jim Fish:

Okay.

Hilary Leon:

Hi, this is Hilary Leon for Toni Kaplan. Good morning, guys. Great quarter. So speaking of the election, sorry to bring it up, but we've had a couple number of inquiries surrounding potential implications of it. Depending on who's elected or who's in the House, how would you expect R&G and RINs to be affected or if at all? And what sort of increase, decrease do you see potentially in your R&G projects?

Jim Fish :

So, Toni, real quickly, you know, Tara did a great job of answering that and she's absolutely right. I would just tell you, we've always said, no matter who's in office, we're pretty agnostic about that. I mean, we all have our own personal preferences, but the business itself does really well in just about any regulatory environment, short of somebody coming in and saying, you know, landfills are closed all tomorrow morning. But short of that, we are pretty agnostic with respect to regulation, whether it's the Chevron doctrine, whatever it is, we do well in just about any environment.

Devina Rankin:

It's insignificant. We had our quarterly business reviews with the Texas market, who was hit the hardest, and they've made projections. But at this point, it's not expected to be material.

Devina Rankin:

Yeah. We all felt more significant within the business world.

Hilary Leon:

Got it. All right. That's it for me. Thanks, guys. Great quarter.

Jim Fish :

Thanks.

Jerry Revich:

Yes, hi. Thank you. Good morning, everyone.

Devina Rankin:

Good morning, Jerry.

Jim Fish:

Yeah, Jerry, it's a little hard to tell at this point. One thing I can tell you is that Stericycle has talked a lot about the fact that as they roll out new systems that those systems will give them better visibility. And boy, we absolutely concur with that. I mean, you know, we like the fact that our systems give us a lot of visibility all the way down at the customer level. So we don't really know what that means in terms of pricing at this point because we haven't had a chance to kind of stick our head under the covers. But we do know that the better the visibility, the smarter you can be with data and analytics and with pricing.

Jim Fish:

Yeah, you know, I mean, I think this is really kind of an outsider looking in because, again, we're not, you know, we don't own the business yet. And we really, for the most part, are looking at public documents. We're starting to go through an integration process where we get to look at some things. But I would tell you that if we look at kind of the medical industry, not just medical waste but medical services, and as you look at the United States or you look at Canada or you look at just about any country, the U.K., France, Germany, I mean, all those countries are getting older. And so that would seem to be a positive for the volume of services in that industry. And commensurate with that, you would expect to see medical waste increase at a similar pace. So why their volumes have been a bit slower than expected, it's hard for me to say. But I sure do look at the future of this and say, this is a business that should have a very strong volume trajectory to it. I do think it will be helpful as we start to look at their customer base. They have a lot of customers that are moving towards kind of larger national account-type customers. And we're very good at national accounts. Our national accounts business has really been a driver of our growth over the last kind of five years to ten years. So as you look at their business that's going, in large part, from these small-quantity generators to more large-quantity generators, the UNHs and the HCAs and companies like that, I think that's right in our wheelhouse.

Devina Rankin:

Sure. So in terms of what we experienced in the second quarter, you know, this is a business where we say safety is priority one and getting our team members home safe every day is the most important job that we all do. And I would tell you that, unfortunately, there were some incidents in the second quarter that resulted in reserves associated with some of the, you know, more significant incidences that we can, from time-to-time, incur in our business. It is not representative of long-term trends. It is not representative of something that we expect to repeat. So I would say non-recurring, not out of period. What I would say with regard to the seasonal trends, and I mentioned this when Tyler and I were talking about margins as well, is what's difficult about typical seasonal trends for us is that roll-off is really a big piece of what can drive seasonal trends upward. And we did not see the roll-off volume pickup that we would have expected to see, and we are cautious about that going into the third quarter. Aside from that, we do expect the traditional benefits that you get from higher MSW levels and the commercial collection line of business in particular continues to be really, really strong in terms of both volume growth, price execution, and really strong flow-through from those efficiency gains that we've had. So overall, seasonality expectations are very strong, and we expect that to continue with the exception of the muted roll-off impact.

Devina Rankin:

Thank you.

Noah Kaye :

Hey, good morning. Thanks for taking the questions and not trying to turn this into a stair cycle deal call, of course, but I just want to ask you one or two quick questions there, and thanks for the deck. The $125 million or greater cost synergies you're, again, referencing, just help us understand what the expected timeline is for realizing those? You talked about run rates. Is this basically something that you get to a run rate on at some point in 2025? Is it earlier in the year? Is it later in the year? How are you thinking about it currently?

Devina Rankin:

So one data point, Noah, that I think is really helpful in terms of thinking about timing and why it would differ from, you know, the timeline that we saw on ADS as an example is that when you think about Stericycle and where they are in their journey, they are just completing their ERP implementation, and we think that there's reason to be cautious with respect to the pace at which we could capture synergies with this business. And Jim did a great job of articulating, you know, some of the work that's going on right now in order for us to be able to fortify our expectations and outlook. But I think that the ERP implementation journey that the Stericycle team has been on is one of the reasons that we're not at a position that we can speak to how quickly we can get there, although you know us well enough to know that we're going to move as fast as we can.

Devina Rankin:

Yeah, so it was about $775 million of unusual activity, and it will be disclosed specifically in the 10Q. But basically because of with the lead up to the announcement of the Stericycle acquisition, we were in a period where we had material non-public information, and we could not remarket our tax-exempt bonds to the marketplace. So we had to repurchase our own tax-exempt bonds for a short period of time. That's what that relates to. We've since already successfully remarketed the ones that have been in place or that could have gone back to the market through July, and then we have additional remarketing activity that will happen in the third quarters and fourth quarters where we expect to fully place those back into the marketplace by the end of the year.

Jim Fish:

Yeah, that's a great question. And I think the consumer has been pretty resilient through all of this, through COVID, through kind of the rebound, and through a bit of a -- look, it's not been a bad economy, but it just hasn't been a -- it certainly hasn't been a blockbuster economy. The consumer has been very resilient, and that's been the encouraging part. I think it shows up when you look at our kind of more small and medium businesses, which are reflected in our commercial. You know, the commercial line of business has been fairly strong for us on the volume side. Resi has been soft, but Resi is not really driven by consumer behavior. Resi has really been driven by John Morris, and John's been really working on improving margins in that line of business. The real softness has been in that temp roll-off, more industrial space. You know, if you look at our numbers, C&D has been soft, but a lot of that is just difficult comps because of the big Florida hurricane last year. Special waste has been pretty good. MSW has been quite good. So we're actually not that disappointed with flat volume, but it's just not the 2% to 3% that we kind of talked about, you know, in 2019 at the last investor day. I would tell you that the consumer seems to be resilient, seems to be fairly strong, so all of that's good for us.

Jim Fish :

One last quick point here when you talk about Stericycle. We really haven't talked that much about the operating side of this, but look, I think there's a real opportunity on the operating side. John's talked a lot about the efficiencies that we're bringing in the solid waste space, the technology that we're bringing to bear. All of that has application in the medical waste space, too, because they really run trucks the same way we run trucks.

Jim Fish :

Yep.

Bryan Burgmeier :

Good morning. Thank you for taking the question. Just a couple of housekeeping items. So maybe just following up on Jerry's question. It sounds like the risk management margin headwind is going to roll off at the end of 3Q, if that's correct. And then can you provide any clarity on the tax rate for 2024? The 1Q, I think, was in the high teens, and it kind of moved into the low 20s in 2Q. What do you think we shake out for the remainder of the year?

Bryan Burgmeier :

Got it. Got it. Thanks for that detail. And just one more kind of housekeeping item is there's a comment in the press release on a small write-down from waste diversion technology. I know it's not exactly material, but just for our own knowledge, what are those investments? I think there was a similar write-down last year? How many of these type of maybe venture capital style investments does WM have out there at the moment? Thank you, and I'll turn it over.

Operator:

Thank you. And our next question coming from the line of Kevin Chen from CIBC. Your line is open.

Jim Fish :

Well, I'll start backwards, Kevin. I think with respect to New York City, we've been a long-term licensed Operator in New York City since the mid-'90s. So that's not the reason why Winter Bros was attracted to us. They're certainly the premier environmental service provider on Long Island. I think you hit on a couple of key things. One, it's a white space for us. It was sort of new real estate. It's not a secret that the Long Island market has got some disposal constraints that are growing at the end of this year with the planned closure of Brookhaven Landfill. They've got intermodal assets and capabilities that play very well into our network capabilities. And on top of that, the business runs really well standalone. So for us, we're really fortunate to have those folks join the WM team. They run about 150 routes out there. It's about 500 employees. So we're excited about that. In terms of the commercial waste zone thing, we've obviously followed it like a lot of other folks, but that was not reasonable for our interest in Winter Bros.

Jim Fish :

Certainly their ability to move waste off of Long Island in modes other than truck transportation was certainly something that was appealing to us, and we view that as, like I said, as some of the disposal constraints continue to grow on Long Island. Their capabilities on Long Island, in addition to the network of assets we have that can receive intermodal waste, was a key contributor in terms of the strategic outlook for us acquiring that business.

Operator:

Thank you. And our next question, coming from the line of James Schumm from TD Cowen. Your line is open.

John Morris:

I think, you know, we talked earlier about C&D is actually positive net of the lapping of the, and the volume's continued to be strong. If you're talking about the yield spread clearly there's a little difference in our yield outlook for landfill volume this quarter versus last quarter. But that's really, that was really distinctive and showed up in one of our areas that took on a good chunk of volume, great business, but an average lower rate. And that has more to do with the geography of where the volume came in from. So we see, in terms of our overall landfill volume, they're still positive. We still see decent trends on the landfill volume side. And if you look at it from a core price standpoint, which is really what we were focused on. If you look at both the landfill and the transfer station core price, you don't see any deviation there. So we're continuing to drive value in terms of the quality of revenue we're bringing into our post collection facilities.

John Morris:

And the last thing I would add is, look at our special waste volume that continued to be strong through Q2 as well. Right.

Jim Fish:

I'm still offended by that number. I think the way I we'd look at that is as we've said all along, this business is really a natural byproduct of our landfills. It's one that provides significant margin accretion for a strong EBITDA to free cash flow conversion. All of those good things that we like, that we talk about it. And last but certainly not least, it adds to our sustainability focus that we really made, kind of a tenant of our strategy a few years back. So all of those things are really good. We've said kind of all along, everything is for sale at a price, but I would tell you $3 billion is not that price. In fact, it's a long way from that price. So right now our focus has been those 20 plants. I talked about kind of where we are on those, and, you know, we've got two that are out there, three I guess that are out there, and we'll have another four coming online this year. We're in process of construction on all of those. As I said in kind of my extra comments to Tyler's question, almost three-quarters of that CapEx is going to be spent by the end of the year, and only 15% of the EBITDA will have been realized. So that's why 2025 and '26 really look like there's going to be a big step up there, not just from R&G, but also the recycling investments. So, again, I know the Reuters article was out there, $3 billion, anything that we own is for sale at the right price. And if somebody threw a gigantic number at us, we would look at it. But for now we're focused on building out the remainder of those 20 plants. Tara has talked about the fact that we've got potential for kind of phase 2, some of these other landfills that are not in that 20. We're evaluating those as well. We're super excited about the R&G business and the recycling rebuilds that we're doing.

Jim Fish :

Yep.

Stephanie Moore :

Hi. Good morning. Thank you. I do want to follow-up on maybe Tyler's question at the beginning, and I don't mean to beat a dead horse here, but I think it's important. You know, and I agree. I think, you know, Jim, you're exactly right. It's certainly a blockbuster year with 10% growth. It's really strong. I think, where we're coming from, and this is probably part of all of our problems is that we're always kind of looking for more or where you could see that kind of incremental EBITDA growth. And I think, as you alluded to and Tyler alluded to M&A seems to be a little bit better. Commodity dollars are a little bit better. The underlying business is performing well. So I think, what would be helpful is maybe if you could talk through areas where it's been a little bit maybe worse than expected or slightly negative. Obviously, we call that a little on the volume front, but anything else that suggests potentially maybe not as strong as everything else, which clearly, quite frankly firing kind of on all cylinders. So helpful there. Sorry for it's long-winded. Thank you.

Stephanie Moore :

Got it. I'll leave it at that. Thank you so much.

Operator:

Thank you. And our next question coming from the line of Toby [indiscernible]. Your line is open.

John Morris :

I think Toby, you hit on one of them on a supply chain and we go back to that for a second. But first let's start with labor. I mean, you know, we still see pressure on a lot of those frontline contributing jobs and I'm sure that they're enduring some of the same pressure there. We've been fortunate and had the capacity to really make some big changes in terms of wages and overall comp packages, etc. And you're seeing it show up in our turnover, which reduces training, improves safety, reduces our labor, etc. I'm sure that's one area where they're seeing pressure. I think there's still a little bit of overhang. You talk to some of these folks on the supply chain side where they've got to recapitalize their fleet or their business. That cost is certainly not getting any cheaper. So those are a few areas we think about when we're seeing some of this activity. But I think Jim really hit on something that was important. I mean, the pipeline is strong. You know, we're on track probably to finish around a $1billion-plus of tuck in acquisitions. We've got obviously three quarters of that done already, but we've continued to be disciplined and make sure that we're, we're filling in white space or buying assets and companies in areas where we see real growth opportunities. And that's why you hear about Arizona, Texas, the Carolinas, Florida, etc.

John Morris :

Well, I think I would, I would tell you is, is if you look at our labor trend over the last handful of quarters, it's certainly trended through Q2 and it's a handful of things. It's lower turnover. That leads to some of that labor pressure, easy, right? You're, you're hiring less people. You're training less people. Your efficiency is naturally better with someone who's experienced behind the wheel of a vehicle as is your safety performance. And that's why you continue to hear us talk about it. And the fact that we're, you know, hovering in the, in the, in the high teens for turnover, not only is that low considering what we were dealing with post COVID, but those are historic lows. So we're going to continue to stay intently focused on that. Cause that is driving the labor benefit.

John Morris:

So the last point I would make on that is we've talked over the last two-plus years about reducing some of the labor intensity from those frontline individual contributor roles that are getting harder to fill and more expensive. You know, we're closing in on 2000 of those positions that we don't need to fill anymore. And we'll be over 2000, call it 2200 to 2300 by the end of the year. And we're approaching sort of the halfway point of what we projected that we could remove the need for as many as 5,000 of those roles. And those are really frontline contributor roles. And again, it's important. It's not like we're walking a single person out the door. Those are folks who are not necessarily lined up anymore to come in the front door. And we're finding ways to use technology and automation to, to replace that.

Operator:

Thank you. And our next question coming from the line of David Manson [ph] from Baird. Your line is open.

Jim Fish :

Yeah. Look, I think the shredded business, we look at that as being complimentary to our own recycling business. It, it wasn't a reason to buy stair cycle, but it certainly wasn't a reason to not buy Stericycle either. I think there, you know, the automation that the terrorists talked about coming into those plants can really be a benefit to the Stericycle business. And by the way, the fact that we're. We're the biggest recycler out there is it matters to size matters in this respect. So we're able to potentially command a better price that we get paid for our material than might a smaller customer of, of those companies like a stair cycle. We process a lot of paper in addition to other commodities. So, so I think there's a couple of places where we really feel like this is going to where we can bring expertise, but we also bring size, which, which makes a difference on, on potentially on price.

Unidentified Analyst:

Yep. Thank you. Best of luck.

Operator:

Thank you. And our next question coming from the line of Brian Butler from Stifel. Your line is open.

Devina Rankin :

So, as Jim said on the document destruction side, you know, it certainly wasn't the reason to buy Stericycle, but it's also not something that we're looking at from a divestiture perspective. I would tell you that when we think about the, the role that their international footprint can play for WM, we've always been intentional about keeping our eye on the U.K. in particular, with respect to traction that they get from a sustainability and recycling perspective. And we've done that more from afar. And this gives us a more active position in an important market to be sure that we're keeping pace with sustainability objectives, more broadly.

Brian Butler :

That's a compliment. I'll take it. I'll leave it there though. Thank you very much.

Operator:

Thank you. Now, next question coming from the line of Sabahat Khan from RBC. Your line is open.

Jim Fish :

Yeah. I mean, it's, you know, we're, we're just in end of July here. So it's a little bit hard to say. I did say that. I don't, I can't tell you I'm super optimistic about the industrial side of, of the business, the roll off side. But by the way, I mean, you know, there's kind of no room to the only direction is up on that business. At this point, it's been pretty soft. But everything else seems to be, I think pretty good. Pricing is, is, you know, something we're, we're pretty good at. And, and, and we use data and analytics, I think quite well as we, as we implement, you know, kind of our -- our pricing changes. So I don't, I don't see any reason to, to, to be concerned about pricing for next year. Volume itself. We'll know a bit more as we get to, you know, get closer to 25 and how the overall kind of economy is, what's the, what the economy is going to look like. But look, I, I think, I think roll off is, is, you know, I don't think it's going to be worse. Commercial is a, one of the early questions was about the consumer. I think the consumer looks pretty strong and I don't see any reason why the consumer won't continue to be strong next year. And then, you know, look, we're adding a business in Stericycle that we do think has a, a stronger growth trajectory, even in the solid waste business, just by nature of where they're, where they are. So I, I'm, you know, fairly encouraged by the volume outlook, but I'll, I'll be able to tell you more as we get closer.

Sabahat Khan :

Great. Thanks very much for the color.

Operator:

Thank you. And I'm showing no further questions in the queue at this time. I will now turn the call back over to Mr. Jim Fish, President and CEO for any closing remarks.

Operator:

Ladies and gentlemen, that does our conference for today. Thank you for your participation. You may now disconnect.

James Fish:

All right. Thanks, Ed, and thank you all for joining us. The WM team delivered another quarter of strong financial results to start 2024, powered by outstanding operational performance in the collection and disposal business. Total company operating EBITDA grew nearly 15% in the first quarter, and margin expanded 240 basis points, driven by substantial momentum on cost optimization efforts and disciplined execution on our pricing programs.

John Morris:

Thanks, Jim, and good morning. In the first quarter, operating expenses as a percentage of revenue improved 210 basis points year-over-year to 60.9%, continuing the positive trend of our disciplined management of operating costs, particularly in our collection business. Through strategic investments in innovative solutions and process optimization, we delivered improvements in operational efficiency, extracted costs, and setting a new standard for managing the middle of the P&L. Combining this strong operating expense performance with the disciplined pricing performance Jim described, we greatly enhanced overall operating EBITDA margins. In the first quarter, operating EBITDA in our collection and disposal business grew $212 million, and margin expanded 310 basis points to 36.6%.

Operator:

[Operator Instructions] Our first question comes from the line of Tyler Brown with Raymond James.

Devina Rankin:

So I'll start with the easy one and confirm there were no accrual reversals or onetime items in the first quarter. The only kind of one-timer that we could point out is actually the loss of the Ian volumes from the prior year that would have been a hill to climb from a margin perspective because, as you know, storm volumes come at high margins. So in fact, the $212 million operating EBITDA growth in the collection and disposal business came with 310 basis points of margin expansion to 36.6% in the collection and disposal business.

Patrick Brown:

Yes, absolutely. Now John, you mentioned 20% resi margin. So can you just remind us where those margins were a few years ago because I believe they're a fair bit lower? And then do you think that those can approach more company average or is this kind of more where you would expect them?

Patrick Brown:

Okay. And then my last one here, Devina, just want to make sure that we kind of have a level set on Q2. So if I look back historically, margins do typically rise, I don't know, 150, 200 basis points sequentially from Q1 to Q2. Just anything to think about why that wouldn't be the case or can you just help us shape the Q2 margin expectation?

James Fish:

Tyler, I think part of that, I'm not sure it's that we're seeing any softening. It's just that we're kind of in uncharted territory here in terms of margin, I mean, which is a good thing, but to have a range that includes -- we've talked about numbers starting with a 3 for a long time, and now we finally have a number that starts with a 3 in our guidance range. So we're just being a little bit cautious about it. We certainly saw the trend that you just mentioned from Q1 to Q2 and on, but as did the field. But we feel like we're being maybe a little cautious as we get into some uncharted territory.

Bryan Burgmeier:

I believe you've said revised EBITDA guidance is about $85 million in underlying improvement. I guess there would be a headwind from the roll-off volume, so it's maybe even more than $100 million sort of underlying number. Did fuel costs play a role in the EBIT guidance raise? And maybe just from a big picture, what changed over the last 2 to 3 months that maybe allowed you to realize these savings a little bit quicker than you may have anticipated in your original view?

James Fish:

I mean, I think the risk there, Devina, was as we discussed it, Bryan, the risk was, with such a strong performance, if we didn't raise guidance, there might have been questions on this call about, so is there something that we're not seeing that you're seeing? Is there something that you had that benefited you? And of course, Devina already answered that. The answer was no. But what we were a little concerned, if we didn't raise margin after such a huge margin performance that, by the way, was on the heels of 2 other quarters, that you might start asking questions about it, are we missing something? And you're not missing anything. We're just improving the margin that much.

Devina Rankin:

Great, thank you. So our original expectations for 2024 were $120 million, so our current outlook of $145 million is a $25 million increase of the ITC benefit in 2024 specifically. With regard to our full outlook for ITC capture over the development plan that we have outlined, we are tracking toward the high end of the original range of $250 million to $300 million.

Jerry Revich:

Really nice performance this quarter. And over time, you folks have consistently expanded margins by 20, 30 basis points per year almost like clockwork. And I'm wondering, as we think about the long-term plan from here, should we be thinking about 2025 as a lower year of margin expansion because we're getting such good price/cost spread this year? Or does that not factor into how you're thinking about the longer-term plan that you folks unveiled, what, 6 or 9 months ago?

Tara Hemmer:

I can speak to that. So as we mentioned, we have 13 plants that we expect to bring online this year and another 13 next year, and those remain on track today. If you think about our exit in 2024 related to headcount, we'll be at a point where we've gotten 70% of the headcount out by the end of 2024 on the automation journey. So we should see not just a pickup from shutdown costs but also from the benefit of 30% improvement in labor costs and operating expenses from those plants.

James Fish:

So to use a baseball analogy since we just signed a deal with Major League Baseball, Tara, we'll be in the seventh inning?

James Fish:

All right, perfect.

Sabahat Khan:

A lot of color there on kind of the tangible labor savings. Is there any way to quantify some of the operational efficiencies or savings in terms of the technology investments that you're making, some of the data analytics tools just in terms of how much bps you might expect over 1, 3 years and what you're kind of seeing relative to expectations?

James Fish:

John, you mentioned also, and John mentioned that in his script that 90% of the roll-off line of business has been rolled out on this [ India ], which is the term for our optimization model. But we haven't rolled out commercial and haven't rolled out residential on that model yet, so we still have a fair amount of room to go there. And all of this is -- it was really 4, 5 years ago, an admission by us, that our routing was not as efficient as it could be if we used -- truly used technology to benefit that. I think that's probably the case across the entire industry. And so 4 or 5 years ago, we decided that, that had to change and now you're seeing the fruits of that.

James Fish:

I think we -- look, there's always room for improvement so I would not tell you that we're -- that we've perfected this. But from when I was a price guy back in the early 2000s, it's night and day. I think the team has done a spectacular job using data and analytics to their benefit and making sure that we are looking at the customer who really drives the decision as opposed to driving the decision just purely based on a number that we needed to hit in our price metrics. So I would tell you that we've made a ton of progress there. Are we perfect? We're not, but so much better than we used to be.

Sabahat Khan:

And then just one quick one, I guess, on the revenue guidance update there. I think just wanted to get a little bit more color on the softer roll-off portion. It sounds like bit of homebuilding and industrial slowdown. Is that just a change in the view of how the macro is going to evolve for the rest of the year based on what you've seen year-to-date? Or was there any specific issue that came up in the industry? Just want to get more color on the evolution of the view on the roll-off and the macro.

Hilary Lee:

This is Hilary Lee on for Toni. Congrats on the quarter, guys. Just want to touch on pricing a little bit. So when you said earlier that you expect price to hold for the rest of the year, does that mean you're expecting core price to be closer to around that 7% rather than the 6% you said last quarter?

Hilary Lee:

Got it. And as a follow-up, just wanted to touch on the sustainability. I know last quarter, you talked about having about $150 million of EBITDA coming from the sustainability investments for 2024. Just wondering if you would be able to kind of give us a little bit of information on potentially the cadence or kind of the split between R&D and recycling. Any details would help.

Hilary Lee:

Congrats again on the quarter.

Michael Hoffman:

Devina, Jim, John, do we have a new baseline in margins? We can now say 29.5% to 30% is the new baseline and we'll grow from there?

Michael Hoffman:

And then everybody, of course, is trying to figure out how they're supposed to model '25 already. But if we -- but you have to have some assumptions, so like what we think inflation is, what we think GDP is. If we said 3% inflation and 2.5% GDP, your price/cost spread on that number should still produce probably 30 basis points of margin. And then you still have everything John and Tara, that's a mouthful. This is my sixth earnings call in the last 7 hours, so it's running together. All that self-help still left, too. Is that the right way to think about, without putting the number on the increment, I start with 30% price/cost spread management, somewhere between 29.5% and 30%, add that 30% to it, and then I get self-help.

James Fish:

I look at it as continuous improvement, Michael. Self-help kind of sounds like I was an alcoholic and I'm coming off the bottle.

James Fish:

I know. Just giving you a little bit of a hard time.

Devina Rankin:

The only thing I would say is that first half solid waste growth is even greater than what we had projected because what you saw is the strong margin performance and growth from the solid waste business really showed up more quickly than we were expecting. So that solid waste lift comes more heavily weighted toward the first half of the year.

Devina Rankin:

Correct.

Devina Rankin:

None of it, zero. All of it's in the tax line.

John Morris:

Yes, that's a good point, Michael. I mean, take that sort of a leading indicator of what we can expect from safety. But there's a clear distinction between somebody who's tenured in the seat and somebody who's not. And that's not a critique of folks who are new in the seat. It's just a matter of having that experience. And we do see a pretty wide spread between those who are tenured in operating a vehicle and those who are not. So as we continue to hold that number down, we expect the safety results to continue to improve as well.

Michael Hoffman:

Yes. And the last one for me. One of the powers of the roll-off business is that when it does slow, you park equipment, reposition drivers and raise prices. Is there anything different in this cycle?

Michael Hoffman:

So we might see a revenue hit for volume but you might not see much, if anything, in EBITDA because you make those adjustments so quickly. That's part of the point.

Operator:

Our next question comes from the line of Stephanie Moore with Jefferies.

John Morris:

I did comment briefly on that. We've taken about 800 rear load trucks out of the fleet and about 650 rear load routes since we really started earnestly pursuing this in early Q2. We've got roughly another 350 to 400 routes we have targeted this year, and I say 350 to 400 because that has to do with some truck deliveries. And that probably -- when we get done in '24, that probably puts us in about the sixth inning, if you want to continue with the baseball analogy. We still got some room to go there. So hopefully, that clarifies that.

John Morris:

Commercial. I think on the commercial side, where we have -- continue to see benefit is really driving efficiency, and Jim commented on it. We've got some more sophisticated, frankly, tools to help us route our vehicles and, in some cases, the dynamic element is where we think -- although it's less in commercial than roll-off, there is a dynamic element to commercial and our ability to real-time route that. And to route around real-time traffic is another capability that we are just putting in, in the system now.

Devina Rankin:

Yes, it's a great question. And I would tell you in terms of the inflationary cost pressure on wages, we have seen that soften. We're currently at about 5% wage inflation for our driver population, and that's certainly down from low double digits at its peak. So that's the labor component that's associated with inflation.

Jack Wilson:

This is Jack Wilson on for Tobey. Can you maybe speak to sort of the other benefits of the recycling facility upgrades other than sort of the potential to remove some positions? And is that capacity-based or is that some efficiency gains we'll be seeing?

Noah Kaye:

So the really strong flow-through into free cash flow performance, can we just walk through how we get that improvement of $100 million? It sounds like, obviously, there's the operating performance, maybe also some tax items going on and then some working capital improvements. Just how do we think about the delta?

John Morris:

So Noah, I would tell you, we're obviously -- that's a topic we're following, I'm sure the whole industry is following very closely. There was some language in the last release from EPA that had some language about some protection for the landfill. But candidly, it didn't go far enough to give us a lot of security around the topic, so we're going to stay close to that. And as you can imagine, we're very vocal in all the right offices to make sure that we find a pragmatic approach to handling this because it is an issue that obviously has to be managed.

George Bancroft:

Congratulations, Jim, Devina, and John, the team on a great quarter. Just longer term, what are you -- is there -- are there any opportunities maybe through something transformational, either be it like these large regionals that are still around that everyone talks about or maybe something in a different line of business? What is your sort of longer-term outlook on the business and any interest in other -- maybe other opportunities?

Operator:

I'm showing no further questions in the queue. I would now like to turn the call back over to Jim Fish for closing remarks.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Edward A. Egl:

Thank you, Josh. Good morning everyone and thank you for joining us for our Fourth Quarter and Full Year 2023 Earnings Conference Call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim, will cover high-level financials and provide a strategic update. John, will cover an operating overview, and Devina will cover the details of the financials and our 2024 outlook. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules of the press release include important information. During the call, we will hear forward-looking statements which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and our filings with the SEC including our most recent Form 10-K. John, will discuss our results in the areas of yield and volume, which unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons unless otherwise stated will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, SG&A expense and prior period operating expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to our earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on February 13, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I'll turn the call over to WM's President and CEO, Jim Fish.

John J. Morris:

Thanks, Jim, and good morning. We're more than pleased with the strong operational performance our team achieved in 2023 showing continuous improvement throughout the year with standout results in the fourth quarter. During this period, operating expenses as a percentage of revenue improved 240 basis points year-over-year landing at 60.3% and marking our second best quarterly performance ever. This improvement was primarily fueled by our collection and disposal business benefiting from the robust operating leverage of our strategic cost optimization. Our proactive measures to accelerate and improve cost efficiency included leveraging technology to manage labor, managing repair and maintenance costs and optimizing our overall cost structure. These initiatives led to a substantial improvement in WM's cost to serve metrics, bringing estimated unit cost inflation to low-single-digits by the fourth quarter. When combined with solid results from our pricing initiatives, we greatly enhanced overall margins. Our strong second half performance translated into full-year operating expenses as a percentage of revenue of 61.7%, an improvement of 70 basis points. That momentum has carried into 2024 and is evident in our January results even as we face severe weather in some areas we serve. Two of the key cost categories driving our operating improvements are labor and repair and maintenance. On the labor front, this begins with our persistent focus on reducing turnover. In the fourth quarter, we achieved a noteworthy milestone as driver turnover reaches lowest point at 18.4%, showing improvement as the year progressed. Additionally, our strategic automation initiatives are yielding positive results in collection efficiency with all three lines of business improving meaningfully in the fourth quarter compared to last year. The results of our technology and automation investments gained traction in the latter part of 2023, leading to significant strides in labor cost management. We expect this to continue into 2024 as we broaden the deployment of our tools across additional sites. Turning to repair and maintenance, with a full lot of trucks received in 2023, we successfully removed over a 1,000 excess assets from our operation, improve the age of our routed fleet and reduce truck rental utilization by nearly 60% since the beginning of 2023. Throughout 2023, our emphasis remained on streamlining maintenance processes, which has resulted in enhanced technician productivity, reduced overtime expenses and diminished reliance on external repair services. This is paid off in the form of lower repair and maintenance costs in both dollars and as a percentage of revenue compared to 2022. We accomplished all this with an unwavering commitment to safety and by enhancing the quality of our fleet. We're proud of the strides we made throughout 2023 and look forward to sustained progress. Another core element of the equation that fueled our strong financial results is disciplined organic revenue growth. Growth from price and volume in the collection and disposal business totaled 6.3% for the year, which outpaced our expectations. Our pricing programs continue to be focused on striking the right balance between maximizing customer lifetime value and increasing price to recover higher costs. Our full-year churn rates remain at the lower-end of historical range at about 9% and the year-over-year improvement underscores our consistent delivery of quality service to our customers. Looking ahead to 2024, we anticipate sustained momentum in our disciplined pricing programs to result in core price between 6% and 6.5% and yield approaching 5%. We remain committed to maximizing customer lifetime value up while securing pricing that exceeds our cost inflation. We've seen that spread improve as 2023 progressed and we are confident that our teams are poised to deliver another successful year ahead. Turning to volumes, our fourth quarter collection and disposal volume grew by 1.9% on a workday adjusted basis. Growth was primarily driven by MSW landfill and commercial collection, two bellwethers for demand of our services. Overall growth in landfill volumes was somewhat muted due to the elevated volumes from the Hurricane Ian clean up in 2022. Some of the recent quarters, residential collection volumes declined modestly due to our intentional shedding of low margin contracts as we work to ensure that we achieved acceptable returns for all parts of our business. You can see the benefits of this focus because while our residential collection volumes declined, total revenue and earnings in this line of business both improved. This is a winning equation and we'll continue to execute on the strategy in the year ahead. Organic revenue growth in all collection lines of business remains as positive and operating EBITDA continues to grow. In the fourth quarter, new business grew and net services increases remain firmly positive reflecting our quality of service and focused differentiation. Looking ahead to 2024, our guidance anticipates collection and disposal volume approaching 1%, mirroring the performance achieved in 2023. And finally, I want to convey my appreciation to our frontline teams for their unwavering commitment to delivering safe and reliable service to our customers and communities on a daily basis. It's their efforts that made 2023 successful and laid the groundwork for growth in the years ahead. I will now turn the call over to Devina, to discuss our 2023 financial results and 2024 financial outlook in greater detail.

Operator:

Thank you. [Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer. You may proceed.

John J. Morris:

Yes. Noah, good morning. It's a good question. Originally, we started talking about just in terms of the elimination of some labor dependency in the 5,000 to 7,000 job range. And it was across a handful of pretty broad areas. One, was the customer experience group. One, was through our routing, which would reduce our dependency on kind of frontline driver labor and obviously then recycling a little bit on SG&A. And what I would tell you is, you think about this way, we're about 75% through what we had planned for the customer experience side on the resi automation and this has as much truck deliveries, which did improve in 2023, we’re about 40% of the way through there. On the recycling side, as Jim mentioned in his remarks, we've got a number of plants are going to be automated this year, kind of Jim, can comment more on that, we're about 20% of the way through there. So, I would tell you we're making great progress. I think it showed up obviously across the board in our margins and specifically in labor in Q4 and as the year progressed, but we still got plenty of opportunity out there. We feel like we're on a good pace.

Devina A. Rankin:

Yes, I think it's a great question, Noah. And similar to what we talked about in terms of the EBITDA dollar growth, the cadence, sorry, for margin is pretty similar. We expect margin expansion to be more heavily weighted towards the front half of the year particularly in the collection and disposal business, the SG&A margin expansion will be fairly even over 2024. But then with regard to the sustainability businesses, the commodity price benefits that we expect to see in 2024 aren't quite significant, right. They're pretty muted on a year-over-year basis. But as a reminder, commodity price expansion in the recycling line of business can have some margin compression because of the really high return on invested capital part of our brokerage business. And, on the renewable natural gas part of the business, we expect margin expansion there too because those are such great margin projects, but those will be heavily weighted toward the back half. So, from a margin perspective, while the collection and disposal business is definitely the thing that delivered in Q4, we do expect that to be the thing that lifts margin most significantly in the year ahead and that will be weighted toward the first half of the year.

Operator:

Thank you. One moment for questions. Our next question comes from Bryan Burgmeier with Citi. You may proceed.

James C. Fish:

Yes, Bryan, a couple of standouts really were continues to be residential pricing and disposal pricing, those actually showed increases year-over-year. Not surprisingly, the other collection lines of business were down, but that wasn't unexpected. As we move into ‘24, we think that kind of 4.5% to 5% yield number is a good target for us. And pricing continues to be a strength. We said at the beginning of ‘23 that our focus areas for the year would be pricing and then the cost controls that, John, went through. So, pricing is going to continue to at least add a little bit of margin for us. We think as opposed to ‘22 where we I've said several times we kind of felt like we were in hand-to-hand combat with our cost structure.

Devina A. Rankin:

Yes, it's a great question. And your recollection of our outlook revision mid-year is spot on with regard to some of the softness we were seeing in the special waste part of the business. And, we saw a strong recovery of that in the fourth quarter, which is one of the reasons that we saw revenue exceed our expectations late in the year. We're not necessarily expecting a rebound of special waste volumes in the year ahead, but we are expecting some of this momentum that we saw in Q4 to carry over, but nothing outsized. The one thing that I would call out as a reminder with regard to some of the special project type work is 2023 did have a benefit from Hurricane Ian volumes particularly in the first quarter, and so that certainly will have an impact on the Q1 comparisons in 2024.

Jerry Revich:

Yes. Hi. Good morning, everyone.

Jerry Revich:

Devina, I wonder if you could just talk about margins, really outstanding performance by the team in the fourth quarter, if we were to just run the seasonally adjusted annual rate, that's about over 30% margin equivalent that you folks put up in the fourth quarter, the full-year guidance for ‘24 is about a point lower than that. It sounds like yield is still very much at a good place. So, I'm just trying to make sure that there are no items that you would view as one-off in the fourth quarter versus, hey, it's early in the year and we just want to make sure we have room to execute?

James C. Fish:

So, Jerry, real quickly, we did kind of anticipate that there will be some questions on margin. And so, just a couple of things here. First of all, the margin obviously for Q4 was as strong as we could have expected it and to be and that has continued as we look at the month of January. January came in quite strong for us, so we're pleased with that. The second point would be around some of the questions that you're asking around conservatism on margin for ‘24 and Devina did a really good job of explaining that. I think it's really just I guess you could argue that it's conservative based on 90 basis points of improvement from 2022 to 2023. But there seems to be an uncertain year in front of us every time we come to this point. We don't know exactly what the economy is going to do. Some days I feel great about the economy, other day is not so great. So, you could argue there's a little bit of economic conservatism in there and also a little bit of forecasting conservatism coming off such a strong year that you want to try and say we're going to do the same thing going forward into ‘24. But we do feel really good about the way we finished the year and honestly the way we've started the year so far through January.

James C. Fish:

So, I'm going I'll say one word on that and then I'm going to turn it over to Tara Hemmer to maybe give a little bit more color. But, that's always an option for us. And we have multiple options and it's good to be in a place where you have multiple options. But at this point, we're pleased with the progress we're making on building these plants. We have a number of plants that are at various stages of construction. Tara, anything to add to that?

Jerry Revich:

Appreciate the discussion. Thank you.

Tyler Brown:

Hey, good morning.

Tyler Brown:

Hey, Tara, actually, I want to come back to the updated sustainability CapEx figures of $2.8 billion to $2.9 billion. So, I may have missed it, but if I'm not mistaken that number was closer to $2.2 billion back at the Analyst Day. Now, I get that there are $350 million in incremental recycling opportunities, but what makes up the difference, call it that $300 million. Was that just inflation?

Tyler Brown:

Okay, perfect. That's helpful. That's very helpful. And then, Devina, thank you so much for the WM renewables segment reporting. But, I do just want to make sure that I understand it all. So, I get the impact in revenues from the change in the price of the commodities that are impacting that WM renewables and recycling line, but if you look at the change in that line versus the change in the net revenue for those, they don't exactly line up. So, it tells me that there's likely some volume component in there. So just to be clear, maybe this would be helpful, but when you bring on a facility like Eco Vista, where does that show up? Does that show up as basically volume in your IRG calc, or can you just help us with how the accounting will work?

Tyler Brown:

Okay. Yes, I definitely think so. We'll parse it out. But I think you mentioned the collection and disposal volume could be up maybe 1%. But again kind of going back to that total IRG table, could we actually see that number closer to 2%? Because I would assume that with $115 million of incremental renewables EBITDA, there's probably at least a couple of $100 million of revenue associated with that, does that make sense?

Tyler Brown:

Excellent. Okay. Last one here, Devina. So, margins were super strong. We've talked about that. I think they're up 230 basis points year-over-year in Q4. But can you kind of help us bridge that 230? I think there was a fewer day, maybe fuel was a help, maybe commodities help, just any color there would be appreciated. Thanks.

James C. Fish:

I think Tyler, a little bit of an add on here is that I've been told we don't pat ourselves on the back enough, so I'm going to pat ourselves on the back a little bit here. When we started talking about some aspirational metrics, meaning margin, EBITDA margin, SG&A as percent of revenue, OpEx as percent a couple of years ago and then talking about technology and using attrition to reduce our labor dependence. Those numbers were pretty far out on the horizon. And, now in every case those numbers are literally a stone's throw away for us. Whether you talk about 30% EBITDA margin, we're right there for the fourth quarter, SG&A at 9%, we're very close to that and OpEx at 60%, very close to that. So, I'm really proud of the team for executing so well on this and being able to stand up on this call today and last quarter as well and say those things that we put out there, those goals that we set, we're getting close to achieving those. That means we're satisfied. We'll continue to set higher goals, but I'm pleased with the fact that we've been able to get to those goals that were pretty far in the out on the horizon we initially set them.

James C. Fish:

You bet.

Michael Hoffman:

Hey, gang. Thanks for the questions. Back to the margin question, John, it seems like looking at this on a two-year stack helps because you can't perfectly time when you get some of your self-help. And that sort of accounts for really strong ‘23, a little more muted ‘24, but the two-year stack is sort of 60 basis points a year. So, where the question underlying that is, recycling is an incremental tailwind because you've got a pretty low estimate there relative to how you finished the year on the basket. GDP, I'm assuming you think it's maybe 1%, 1.5% and the trend is stronger than that. So, that's a tailwind. And then I think your wage growth is probably running closer to 3.5%, 4%, therefore, there's clear spread on price cost. Am I looking at that correctly?

Devina A. Rankin:

And then I'll just add a little bit of color that provide some clarity on a couple of the points that you brought up, Michael. One, with higher recycling commodity prices, the brokerage business can actually put downward pressure on margin. And so that's one of the things that we have built into our outlook for 2024. And then, in terms of wage inflation, we start at 4% with our folks. And so, wage inflation is still expected to be north of 4% when you take into account spot increases that we have to provide in certain markets to be responsive to various changes. So, 4% is kind of our baseline, and then you add on top of that.

Devina A. Rankin:

Yes. Basically, what we've always said is that we believe that our volume is about a 75% flow through from GDP. And so, we did have a fairly muted outlook with regard to GDP when we built our plan. I hope your crystal ball is better than mine, but I would tell you that our expectations for economic outlook continue to be that we need to be on the cautious side of things just because there's so much left in uncertainty, you saw that with today's print on CPI as an example, which exceeded expectations.

Tara J. Hemmer:

So, starting with the real positive, the one thing that the federal government did is, said a three-year RVO and having that for 2023 through 2025, you've seen clear stability in the program and so that's been a positive. With the ITC, we think when Treasury issued their guidance that there was a misinterpretation over what was in the Inflation Reduction Act and we don't just share this view, others do with us that are in the biogas community and generate landfill gas renewable energy from landfill gas. We've commented on that and we're anticipating that Treasury will come out with some further guidance later this year and so cautiously optimistic there. So, there's a whole host of credits that could be stacked. Obviously, the ITC was within our plan and we remain optimistic related to that and of course looking to 2025 with the production tax credit too.

Michael Hoffman:

Okay. And then some housekeeping if we could. I love the segment reporting as well. Are we going to get any kind of tons-in, tons-out so we can actually do a bottoms up forecast on sales for the renewable and processing segment, and then how about megawatts and MMBtus to be able to do the same thing on a sales growth for renewables?

Michael Hoffman:

So in the K, one, when will it be recent? Two, will we get quarterly data for all of ‘22 and all of ‘23 and then three years of forecast so we can we build our models in this format?

Michael Hoffman:

Okay. Thank you.

Stephanie Moore:

Hi, good morning. Thank you.

Stephanie Moore:

So, just kind of just looking at the 2024 guidance assumption, it looks like you're assuming RINs at about $3 which makes sense given where RINs are today, but digging into a little bit more, can you maybe talk about in terms of what contracts that you have already signed and kind of where you're able to lock in those prices going into the year? I think you said a sustainability day that you were looking to have 70% to 90% locked in any given 12-month period. So, any update on where that stands for 2024 to get to that $3 RIN? Thank you.

Stephanie Moore:

Got it. No, that's very helpful. And then maybe sticking on the sustainability front, you talked about some incremental investments included in your updated outlook and you noticed that that involves two projects in Canada. Can you talk a little bit about the opportunity? I'm assuming that those are probably related to EPR changes in Canada. If that is the correct assumption, maybe just what how EPR might change the margin or growth opportunity compared to maybe your more traditional U.S. recycling business, so how are you thinking about those incremental opportunities? Thanks.

Stephanie Moore:

Understood. Thank you so much.

John Mazzoni:

Thanks for taking my question. Maybe just a quick one in terms of the sustainability EBITDA timing. Is this just really kind of a knock on impact of some of the 2023 project delays, I think we noticed change to run rate versus kind of in ‘26, any color would be appreciated? Thank you.

James C. Fish:

And John, those supply chain constraints are not that different from what we've seen on the fleet side of our business either. The good news is that as you heard, John Morris, talk about it, we started to see that free up a bit and so Tara seeing the same thing on the RNG and recycling side, but we definitely had some supply chain constraints that contributed to this bit of a slowdown over 2022 in particular, but also the front half of 2023.

Operator:

Thank you. One moment for questions. Our next question comes from Tobey Sommer with Truist Securities. You may proceed.

James C. Fish:

So, look, we said that our acquisition pipeline was robust. I think what you're seeing is that some of those, and I'm speaking just from this is somewhat anecdotal and speaking to some of those folks that we have acquired, is that, there's kind of a multitude of challenges for them, some of which we face and some of which we don't face. So, one that we might not face is a lack of a succession plan for some of these folks. Their kids have just decided they don't want to run the business. They'd rather go take the money and live in Italy. And so, that's not something we face fortunately, but they're also having challenges with labor. We're addressing that as you've heard today through automation and in some cases they are as well, in some cases they're not able to do that. So, there's a number of different reasons why there's a growing list of willing sellers. We're going to take advantage of that. But at the same time, we've invested heavily in these organic growth projects, and we want to make sure that we have similar returns before we go invest heavily in tuck-ins.

James C. Fish:

Yes. Tobey, we got about, we've delivered about 1,700 units this year, which was a little light of what we had planned for, but that would be really considered a full lot. And we probably have another 300 units on top of that to deliver. So, I would say that by the end of ‘24, we're fully caught up. What I would tell you is, team has done a really good job of not compromising the quality of our fleet had shown up in our service and it's really starting to show up in the back half of the year in terms of our operating performance and we see that continuing into ‘24, and certainly as we get the benefit of some additional vehicles.

Operator:

Thank you. One moment for questions. Our next question comes from Kevin Chiang with CIBC. You may proceed.

Devina A. Rankin:

We can specifically confirm that number for you. We didn't refresh that.

Devina A. Rankin:

But the key takeaway for us there, whether it's 70% or 90%, and that's kind of the zip code that I think we should be thinking about. The free cash flow conversion in these businesses is stronger because, the maintenance capital is lower. And so, it is right to think about that being a really strong fundamental contributing factor to the long-term yield of this business.

Tara J. Hemmer:

You're exactly right. Those two are in Ontario and this is something that we're actively tracking throughout Canada and then of course looking at where there is pending legislation in the United States as well. There's obviously Colorado as an example, which is on the front and making sure that we're well-positioned to respond to the PROs when they eventually implement.

Operator:

Thank you. One moment for questions. Our next question comes from James Schumm with TD Cowen. You may proceed.

Tara J. Hemmer:

The way to think about it and what is really unique about WM, is because we have our own fleet of compressed natural gas vehicles. We're in a very unique spot where we are able to close the loop. We produce renewable natural gas. We can allocate that renewable natural gas to our fleet to generate the RIN, so we don't have to give up any of our RIN value. That's probably the most significant advantage with WM as compared to others in the space. And that's how we monetize and create RINs ourselves versus others having to really tie it to someone else's fleet.

Tara J. Hemmer:

No. I think --

Tara J. Hemmer:

I think we get the full value and the other thing to bear in mind is, you're looking at spot prices. And while we do play in the spot market, we also have been very actively looking at how we can forward sell and really look at selling our RINs six months out, a year out. So, there's a balance there.

James C. Fish:

Yes. I mean, we've been in hazardous waste space for quite some time and it continues to be a valuable component of our portfolio. And we've got coverage nationally. We've got assets on the East Coast and then obviously to the South East and on the West Coast as well. And, I would tell you, we continue to look for opportunities to grow that business. I think one of the benefits we have is, we've got a tremendous network of transportation assets that allows us to access a lot of the prominent markets, I think the Southeast, the Gulf Coast is one where we are very, very well-positioned, in terms of our hazardous waste presence.

Operator:

Thank you. One moment for questions. Our next question comes from Walter Spracklin with RBC Capital Markets. You may proceed.

James C. Fish:

Well, I think you've hit on the right focal point for us which is that price cost spread as opposed to just looking at price because obviously, in ‘22, price was higher. But as I said, we were really just combating this real high inflation in ‘22. ‘23 was as you said back to a point where the price cost spread starts to widen a bit. And so how much that widens is a little bit of a question mark. We don't know exactly where inflation goes. This morning's numbers were maybe a little disappointing to the market. But we feel good about the wage inflation. We feel like that is much more kind of something we have control of now, whereas two years ago, we really had less control over it. I think you'll see the price cost spread stay pretty close to where it's been in 2023. 2024 won't be a big change from that standpoint.

Tara J. Hemmer:

I can go ahead and take it in two parts and I'll speak to the commodity price piece first and then the timeline second. So, on the commodity price piece for recycling, I think one of the things that we've done really well is really change our model to be a fee-for-service model and we have 95% of our contracts through that, which is really insulated us a bit on the commodity side. And then on top of that, recall that a significant piece of the benefit is coming independent of commodity prices, really those labor cost improvements and also some price premiums that we get related to the automation benefit. On the renewable energy side, one of the things that we've been clear on is that we're going to work towards an 80-40-20 framework where 80% of our volume would be locked up within one year, and that would be something that we would be working towards in 2026. You heard me mention roughly a third of our off-take is already locked up. So, that gives us some confidence on the commodity price side. Related to projects, we've really been kicking this around, looking at our project timelines and making sure that we're within a strong and confident range for 2024. We have two large projects that are coming online in Q3 and so feel confident in our ability to hit the project timelines on both the recycling and renewable energy side.

Operator:

Thank you. One moment for questions. Our next question comes from Toni Kaplan with Morgan Stanley. You may proceed.

Tara J. Hemmer:

I think you have to compare the $510 million to the $500 million, because the $500 million number was without the e-RINs and the third-party RNG projects. So, the best way to think about it is we've increased our target by $10 million for the renewable natural gas business.

Tara J. Hemmer:

A portion of it is from the two new projects in Canada and then a mix of other benefits from our portfolio projects.

Operator:

Thank you. I would now like to turn the call back over to Jim Fish for any closing remarks.

Operator:

Thank you for your participation. You may now disconnect.

Ed Egl:

Thank you, Victor. Good morning, everyone, and thank you for joining us for our third quarter 2023 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules in the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today’s press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the third quarter of 2022. Net income, EPS, operating EBITDA margin and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today. To hear a replay of the call access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on October 25, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I'll turn the call over to WM's President and CEO, Jim Fish.

John Morris:

Thanks, Jim, and good morning. I'd like to open by highlighting the strides we're making in optimizing our cost structure. In the third quarter, operating expenses as a percentage of revenue improved 90 basis points year-over-year to 61.3%. The collection and disposal business contributed 70 basis points of this improvement due to the strong operating leverage provided by our cost optimization efforts. In addition, we achieved pricing leverage as core price exceeded cost inflation by an estimated 100 basis points in the quarter. We're pleased with the progress we've made in managing our labor costs, as well as expenses related to repair and maintenance. Our efforts have resulted in a meaningful decline in WM's underlying cost of inflation since the beginning of the year to mid-single-digits in the third quarter. Our focus on efficiently managing labor expenses is yielding positive results. So far this year, we have automated 141 residential routes and have a target to convert more than 400 routes in 2024. As we shift to more automated routes, we've seen a nearly 14% decrease in the number of helpers needed in our residential business. In addition, our focus on reducing turnover continued to produce improvements in Q3, building on the consistent progress we've made over the past 12 months. Our collection efficiency has also exhibited steady progress throughout the year with commercial, industrial, and residential business line showing improvements every quarter. All these focus areas on managing our business are contributing to the improvement in labor costs. Turning to repair and maintenance expenses. Despite some lingering effects of inflation and the timing of fleet deliveries, we're making progress. For the first time in several years, we expect to get an allotment of vehicles that aligns with our fleet replacement strategy with more than 1,200 received to-date. This has allowed us to remove older trucks from our fleet and also reduce rental truck usage by over 40% since the start of the year. Furthermore, our spending on third-party technicians has been reduced by two-thirds compared to the second half of 2022 and continues to improve. With the progress we've achieved in the third quarter, we believe we've turned the corner on this expense line and are optimistic about ongoing improvements as we close out the year. Turning to our revenue growth. We continue to execute on our revenue management programs to recover cost increases and improve margins. Our third quarter organic revenue growth in the collection and disposal business was 5.7% on a workday-adjusted basis. This growth was led by core price of 6.6% with collection and disposal yield of 5%. Our differentiated service offering is generating value with our national account customers as well as commercial customers. We continue to focus on maximizing customer lifetime value and our Q3 churn of 9% remains at the low end of our historical range, demonstrating the positive momentum we are seeing with customers valuing our service offerings. Looking at volumes. Third quarter collection and disposal volume grew by 0.7% on a workday-adjusted basis. Our landfill business drove most of the volume growth as special waste grew 11.1% on a workday-adjusted basis in the quarter. As a reminder, we do not separate special waste into yield in volume and in Q3, we benefited from several high-priced projects that drove the increase. So, we've highlighted in previous conversations, the timing and pricing of special waste projects is subject to variability due to their discretionary nature. However, our project pipeline remains robust. In addition, Workday adjusted MSW volumes were up 1.7% in the quarter. Our overall collection volumes were down modestly due to the intentional steps we continue to take to price every contract to achieve acceptable returns as well as the impact of lower volumes from our roll-off business. Yet both revenue and operating EBITDA continue to grow in each line of business, demonstrating that we are prioritizing profitable volume growth. Net new business and net service increases remained solidly positive and growth in our strategic accounts business, driven by our differentiated offerings, continues to outpace our expectations. Thus, overall collection and disposal organic growth is on pace for the year. With regard to recycling and renewable energy, our third quarter results were in line with our expectations and our recently automated recycling facilities are delivering strong results. As Jim discussed, our sustainability growth projects are tracking well and we're confident that our operating EBITDA expectations for the year remain in the range provided last quarter. In closing, I'd like to express my gratitude to our frontline teams for their dedication to providing safe and dependable service to our customers and communities each day. I'll now turn the call over to Devina to discuss our financial results in further detail.

Operator:

Thank you. [Operator Instructions] Our first question will come from the line of Bryan Burgmeier from Citi. Your line is open.

Jim Fish:

Good morning.

Jim Fish:

Yes. So I guess a couple of - you mentioned volume, then you mentioned the EBITDA range. So I'll tackle volume first here, Bryan. When we looked at volume, we were obviously pleased with a couple of things, special waste, as I mentioned, was slightly better. Some of that was rate related, really. But for the most part, volume was as we expected, which was fairly flat. We said at the beginning of the year that volume would be flat. And it's been fairly flat all year. Third quarter was slightly better than the first two quarters. I think the collection volumes have been flat pretty much all year long. It's been a - it's different from one line of business to another. Resi almost really by design has been down probably for a couple of years at roll-off was probably the more disappointing of the lines of business and then commercial might have been the one that was more encouraging. So commercial was up slightly, roll off down and then resi by design. And then within the landfill line of business, not anything really unexpected there other than maybe special waste and maybe C&D a little bit. C&D has a little bit of a mix there. And in particularly when you get to the fourth quarter, C&D is really going to be a difficult comparison because of the hurricane last year. But overall volume, I think is not - it's not going to be a big change when you get into the fourth quarter. And honestly, what you're going to see in 2024, and we'll give, of course, our guidance when we get to the next quarter, but 2024 is going to sound pretty similar to 2023, I think, when it comes to volume. I guess when it comes to the EBITDA range - and we anticipated that there would be a question of, okay, so nice performance on EBITDA. So why not give us a number in the higher end of the range. And I would just tell you, there's going to be a natural level of conservatism here because whether it is - not that we're affected much by geopolitics, but there's a lot going on right now that makes it a little bit hard to see out into beyond a month or two. I think that's why 2024 is still a question for us. How does 2024 look? We're going to wait three months before we really try and put a pin on 2024. But for 2023, we're comfortable with the range. We feel comfortable with the quarter. And to the extent that it ends up where we expect, then we were right to not change it. If it's higher than we expected, then it beat us up at that point.

Tara Hemmer:

Sure. This is Tara Hemmer, Chief Sustainability Officer. I think there are two key takeaways that we want you to hear from us related to our sustainability-related investments. And the first is our level of confidence in our 2026 EBITDA projections, the $500 million for renewable energy, the $240 million for recycling. We've spent a lot of time really looking at our projects and we're very confident in our ability to deliver those numbers in 2026. The second thing that is important to note and it's one of the reasons why we have this level of confidence is in 2024, we expect to have about 40 projects under active construction. So that gives you a sense of the momentum that we're building within the platform. If you look at the capital related to some of the shifts, it is related to both recycling and renewable energy. It's not just specific to recycling. So I want to leave you with that. But the important thing to remember is these capital shifts that we see, we see something similar in our traditional business where construction projects really don't know calendar years. And so some of this is about shifting some things from Q4 into Q1 and Q2.

Operator:

Thank you. One moment for our next question. And our next question will come from the line of Tyler Brown from Raymond James. Your line is open.

Jim Fish:

Good morning.

Tyler Brown:

Hi. John, I know it's early, but it does feel like unit cost inflation is starting to ease. I'm just curious, you said mid-single-digit unit cost inflation in the quarter, but can you be a little bit more specific on what that was? And two, just any early thoughts on how you guys are thinking about core price into next year in order to offset unit cost inflation to get to that 29% margin that Devina talked about.

Devina Rankin:

Tyler, I'll just add a little bit of color in terms of specific amounts when we look at core price covering cost inflation for the portfolio overall. We talked about in Q3 that getting to a positive 100 basis points, which is fantastic for us to see. As you can appreciate, pricing activities don't link directly to when we see cost inflation. And so when we look at Q1 and Q2, the variance between those two measures was a negative 500 basis points. In Q2, we had improved to negative 250 basis points. So what you see is the continued progress in terms of making sure that on an annual basis, we are seeing those pricing activities cover our cost inflation and when you couple that with the cost optimization efforts that we're putting forth to more efficiently run the business and getting some help from truck deliveries we're really starting to see the math associated with price covering inflation and hopefully getting to a point at some point where we start to see that as a lever for incremental margin expansion as well really take hold in the third quarter.

Jim Fish:

Yes. We can both kind of address this, Tyler, right. I think, first of all, it's important to understand, and Tara mentioned it in her first question there that we really would prefer that you anchor on that $740 million. That's the number that truly is to be modeled against. The other numbers, look, there's - because of the movement and we anticipated some movement in capital spending, we anticipate some movement in permitting. We've had a good story on permitting in Canada. I mean so - but we've also had delays on supply chain and hence, the movement around in CapEx from one quarter to another. And so the numbers that we gave were really more of a buildup to that $740 million, not intended to be guidance. So that's, I think, first point. The second point here is that with 40 active projects ongoing, there's - and a lot of movement by the way, both in recycling commodity prices and D3 RIN pricing, natural gas pricing, those businesses are really - it's why we wait to give guidance until February. I know companies give a lot of guidance this time of year. But our preference is to wait and give ourselves a bit more time, particularly in today's in today's climate, where visibility isn't fantastic. You can't look off the bow at a ship and see for 20 miles. Now it's not 10 feet either, but it's not 20 miles. So we're really giving ourselves the benefit of a little bit of extra time before we try and answer that question directly. And I'm not trying to punch your question, but it is just going to be much easier for us, for Tara or Shahid for that whole team for Brent Bell to give a very precise answer in early February than it is today.

Tyler Brown:

Okay. Yes. No, I completely get it. And maybe just my last one kind of in the same day, and I'll try again in a little bit different way, but it looks like you deferred about $230 million, I think, from your original guidance on green CapEx. So should we think about $750 million kind of maybe being a number to use for next year as well just on the CapEx side? Thanks.

Tyler Brown:

All right. I appreciate it. Thank you.

Operator:

One moment for our next question. And our next question comes from the line of Tobey Sommer from Truist Securities. Your line is open.

Devina Rankin:

Yes, that's exactly right. When we look at the levers that have been used to deliver SG&A in the current year, it really is our focus on technology and optimization, particularly with some of the success that we've seen in customer experience and sales. And that customer engagement model is something that we know will continue to create momentum in the years ahead. And the cost discipline as well has been really important. So 9% as a percentage of revenue, we feel like is a new long-term sustainable level of SG&A going forward.

Jasper Bibb:

That makes a lot of sense. And then I was hoping to follow-up on the sustainability capital spending. I guess, what are the most frequent issues you're seeing that are delaying these projects, whether it's supply chain or permitting? And the projects that were already delayed earlier this year, any color on what's been the experience or the time line on resolving those earlier delays?

Jim Fish:

Yes Tobey, we talked about yesterday, the single biggest plan, and I mentioned it in my remarks, which is Fairless in Pennsylvania. That is our single biggest plan that we will build in the 20 and to give you some perspective, that plant was originally, originally scheduled for opening in the second quarter, beginning of May. And it's pushed a little bit. And right now, it looks like it's scheduled to open at the end of June. So it's pushed a couple of months. But I think that gives you a good feel for what's happening here. We're not talking about pushing things back 12 to 15 months, they're moving in kind of 60-day - 30- to 60-day increments, but it is having some effect on CapEx, for example, but I think the fact that we've got 40 active recycle and RNG plants in 2024, you'll have quite a few more - you'll have another big chunk in 2025. And then we get to 2026, we're very comfortable with the end number.

Operator:

Thank you. One moment for our next question. Our next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Jim Fish:

Good morning Jerry.

Jerry Revich:

I'm wondering, if you folks can talk about the opportunity for lower R&M and what that could mean for you folks. Really interesting in the quarter to see your operating expenses essentially flattish, given John, the inflation items that you mentioned earlier. And so as you folks get the truck deliveries online, et cetera, how much further could the cost structure improve off of the strong levels we're seeing in 3Q?

Jerry Revich:

Devina, thank you. Just to clarify, so it sounds like it could be not just lower inflation going forward. It sounds like it could actually be a decline in spending, if I understood your comments correctly?

John Morris:

I think the other benefit, Jerry, is just a little bit more detail than the M&R question, but it's not just M&R. We're also seeing it show up in other parts of the business, in particular, in labor and efficiency, right, because when we're putting newer trucks on the street that obviously benefits in other places just as opposed to maintenance and repairs. And we're seeing that show up in efficiency.

Tara Hemmer:

Yes. I mean we're still targeting and using that framework that we had in place, really thinking one year out having 70% to 90% of our volume locked up two years out in that 40% range and then three years out, 10% to 30%. I think what we have to be clear about is when we think about that, it is transportation versus voluntary market, but you can also do fixed priced or longer term deals in either market, and we're going to be accessing both of those. If you think about our portfolio for 2024, one thing that's important to note is we had done some deals in the voluntary market. A great example is we did one with a large utility 20-year agreement with pricing that's north of $20 a ton - sorry, $20 per MMBtu, old garbage gallon, I mean, at $20 per MMBtu. So on a blended basis, if you look at 2024, we have roughly 30% today of our volume locked up, and that will, of course, have an impact on pricing. We are tracking very closely the transportation market, and we've been watching what's happening with RINs and the price pop. What's important to note there though is, we don't necessarily access the spot market. We are looking at the spot market but also selling forward. So we want to just caution people about just taking a $3.4 RIN price that RINs are trading at today for future pricing in 2024.

Tara Hemmer:

Absolutely. Absolutely. Like, we're more positive pricing going forward into the fourth quarter and of course, 2024.

Operator:

One moment for our next question. Our next question comes from the line of Noah Kaye from Oppenheimer. Your line is open.

Devina Rankin:

Yes. The way that we've looked at the 29% is basically the second half of 2023. Our target was to deliver 29% EBITDA margin. What you see is a 29.6% in the third quarter that modestly outpaced our expectations for the quarter. So it gives us some room in terms of our fourth quarter expectations. But Q4, you can expect us to be in the range of the 28.5% to 29% margin.

John Morris:

Yes. The collective bargaining comment was simply some dollars we spent in preparation for some contracts we had in the Midwest, which thankfully got resolved. But when we have big agreements like that, it's not uncommon for us to spend some money to make sure we're prepared for the worst, so to speak. But in this case, it was a better outcome and those are behind us. And on the labor front, part of my comment earlier was just in the moderation of rate inflation that we've seen from 10%, 11% coming out of last year into the first quarter or two of this year and now being closer to the 5% to 6% range in terms of the rate that labor is going up. And you put that against the backdrop of our pricing strategy, which Jim commented on, we continue - we're seeing a better spread between what's happened with inflation and some of those costs, in this case, specifically labor.

John Morris:

And the turnover is still a good story. That was part of my prepared remarks, too, and driver being the biggest. We have about 21,000 drivers in the network and we're continuing to see improvement there down into the low 20s from probably a peak up in the high 20s to close to 30% 18 months ago.

Noah Kaye:

For sure. And I just wanted to follow-up less quickly on the truck delivery side. It's been great. And clearly, you're seeing that benefit on the MNR of those increased deliveries you already comment to what you expect this year? I know there have been some investor questions around the impact of the UAW strike at Mack, but we do have built slots opening up for 2024 now. Can you just comment into visibility into continued strong truck deliveries?

Noah Kaye:

Excellent. Thank you.

Hans Hoffman:

Hi. This is Hans on for Stephanie. I was just curious if we could sort of bridge the 100 bps of margin expansion. I know you guys kind of called out sort of optimizing the overall cost structure in the collection and disposable side, but just curious if you could sort of parse out the other item impacts like fuel, ITC and M&A?

Hans Hoffman:

Got it. That's helpful. And then just kind of shifting gears a bit. Just kind of curious if you could talk about the greatest - where do you have the greatest sort of pricing opportunity? And how should we be thinking about your pricing power in a lower inflationary environment. And I was also just sort of wondering if you could just remind us what percent of the restricted book is tied to waste and see trash collection portion of CPI versus actual headline CPI. I think it's kind of important as that kind of component has been accelerating kind of for most of this year and probably will average a point or two higher than headline CPI, which could have some impact on pricing next year.

John Morris:

The only thing I would add there, Jim, is when you look at our customer metrics, which is another benchmark and you look at our new business, our lost business, our net new, our churn numbers, our rollbacks, all those KPIs around how that's impacting the customer are still on a good trajectory as well. So to your point, it feels like overall, we're in a good spot.

John Morris:

Yes, I think that's a great question. One of the friction points, obviously, of turnover is the experience level, and that does translate to two things. One, it can translate to safety and it could translate to efficiency and we've seen positive momentum since the beginning of the year for each quarter in each line of business. And two of the three lines of business went back positive in the quarter. All three were positive in September. We're seeing the positive efficiency momentum continue into October. So that's probably the best benchmark for us to look at in terms of where that shows up.

Operator:

Thank you. One moment for our next question. Our next question will come from the line of Dave Manthey from Baird. Your line is open. Dave Manthey from Baird. Your line is open.

Jim Fish:

Yes, I hear you. Yes, we got you.

Tara Hemmer:

So none of it is cut. And yes, the plan is to catch up. As Devina mentioned earlier, it would be spread throughout 2024 and 2025 with some of what was originally in '24 moving to 2025.

Tara Hemmer:

So the 11.72 is constant. That's a constant conversion rate on the RINs.

Dave Manthey:

9%?

Dave Manthey:

Perfect. Thank you.

Operator:

Thank you. One moment for our next question. And our next question comes from the line of Brian Butler from Stifel. Your line is open.

Jim Fish:

Yes.

Brian Butler:

Just to try to keep it quick. On the pricing side, when you talked about kind of that spread over inflation being negative in the first half of the year and kind of positive 100 basis points, how should we think about that going into the fourth quarter? And then maybe longer term, where does that spread - where do you hope that spread or target that spread to kind of even out in 2024 and kind of beyond?

Brian Butler:

All right. That's helpful. And then on the - I know we talked a lot about the productivity and optimization. But just at a very high level, I mean when you think of what's left to do and what's been done, is it reasonable to believe that 2024 can produce kind of the similar kind of levels, if not better, than what you saw in 2023?

Jim Fish:

By the way, one thing we really don't talk about much when we talk about this rear load to ASL conversion. We talk about the heads coming out because there's obviously a helper on the back of a rear loader. What we don't talk much about is the pickup in efficiency or productivity because we are - our history, and we've got a long history of making these conversions. We are much more productive on an ASL than we are on a rear loader. So there's, I don't know, John, 20%, 25% pickup in productivity in the resi line of business where you're making those conversions.

Brian Butler:

Okay. And then one last quick one. On the sustainability deferred spending, that's all process related. That's not waste management making a decision based on where market prices are to delay any of that. It's really just a matter of going through the mechanics of getting the approvals and things like that?

Brian Butler:

All right. Great. Thanks again for fitting me in.

Operator:

Our next question will come from the line of Kevin Chiang from CIBC. Your line is open.

Devina Rankin:

I think it's a great question. I think what's most important is that while we compete in the marketplace, we also compete with ourselves and working to continuously improve our business. And so price is one element of how we grow our business and another part of how we grow our business is ensuring that our cost to serve continues to improve over time. We do believe some of those cost improvement items actually translate into top line growth over time as well. And the best example of that is actually in the national accounts business, where WM is completely differentiated itself in the marketplace and therefore, getting outsized growth on the volume line. The other thing that I think is important, and we don't tend to do this, but I want to do a quick comparison our 29.6% margin in the quarter actually compares to our largest competitors at 31.1% because of the impact of the recycling line of business and accretion. And so when we think about how our margins are comparing in the space, we're really proud of the progress we're making. And I think that 31.1% demonstrates the strength of the process improvements that we've been putting in place and the price execution we've had.

Devina Rankin:

Thank you.

Jim Schumm:

Hi. Thank you and good morning. You talked a lot about price, but you also mentioned that churn is at historical lows. I mean, why not try and push price a little bit more here? What's the - I mean I know you can lose some business, but given that churn is low, why not push price more?

Devina Rankin:

On the disposal side of the business, I think it's important to really emphasize some recent success the third quarter was the best ever disposal core price that we've had in our business. And we're pricing new business up 9% on a year-over-year basis in the disposal part of our business. I think it indicates the strength that we're having there. And pricing has typically in this business been on the collection side. And what you're seeing is we're taking that discipline and customer lifetime value approach and extending it all the way through our value chain.

Jim Fish:

But I don't John - its transfer stations. I mean for many, many years, Jim, we never even took a price increase. I mean transfer station pricing was 0.5%. And if you look at our transfer stations pricing, which really is kind of a proxy for landfill, I mean they're - for all intent purposes, they're kind of close in landfills, if you want to think about it in that way. And our transfer stations pricing and the yield number for transfer was 7.1%. And that is a - honestly, it's kind of close to historical highs. I mean we did have an 8.9% in that line of business in Q1. But other than that, it's close to the highest number on my entire period. It goes all the back to 2017. So not saying we can't continue to push price. We absolutely believe we can. We do have to be conscious of that customer lifetime value that John mentioned.

Jim Fish:

Well, yes, let me kind of say this about the M&A market here. First of all, at a time when interest rates are kind of a multi-decade highs and there's a bit of uncertainty about the economic outlook here. I'd rather pay 3 times this $740 million that we've talked a lot about today than get into a process based on kind of rosy forward forecasts and race to the top. And that's kind of what it feels like in some respects in the M&A market today. So it doesn't mean we're not going to be in the M&A market. We will be. And when we're in that market, we're going to very much focus on strong strategic growth opportunities and tuck-in acquisitions. But I just I don't want to get into a competition, particularly based on these kind of future forecasts that may or may not become realistic or achievable. As it compares to the overall capital allocation plan and share repurchase, we've laid out that we had $1.5 billion in authorization. And we've talked about $1.3 billion being the actual number. We look at all kind of aspects of that capital allocation plan. We will continue to evaluate dividends, share repurchase, M&A. Devina has talked about the balance sheet, and she's always done such a great job of keeping that balance sheet in a good place. But most of - if you think about it as M&A dollars, a lot of that has not been technical M&A. It's been these investments that Tara talked a lot about. And those are basically an acquisition that we're paying three times for instead of 12 or 14 times for.

Jim Fish:

You bet.

Stephanie Yee:

Hi. Good morning. I was just looking at the average yield guide for 2023. I think the expectation was for it to be over 5.5 percentage points. And based on the trend year-to-date, it seems like there should be a big step-up in the fourth quarter. Is that typical seasonality? Or is there anything abnormal with year-over-year comps in this year, implying a big ramp in average yield in the fourth quarter?

Stephanie Yee:

Okay. Thank you. That is very helpful. And then if I can just go back to the comment about the futures market for RIN pricing and how you're not necessarily pricing at the spot market $3.40 RIN price. Can you just help educate me a little on? Is there an actively traded futures market for RINs? And is maybe waste management leading that development of the futures market?

Stephanie Yee:

Okay. That's helpful. Thank you.

Toni Kaplan:

Thanks very much. Earlier in the call, you talked about commercial being encouraging. I was hoping you could add any additional color to that. And I know that you don't want to go too much into 2024, but maybe just give some color on, whether - where you're most optimistic, whether it's commercial, resi, industrial, like recovery in any of roll-off. Anything that you're thinking could be better in 2024 versus 2023? Thanks.

Toni Kaplan:

Yes. Yes.

Toni Kaplan:

Thanks very much.

Operator:

Thank you. And with that, I would now like to turn the conference back over to Jim Fish, President and CEO for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Ed Egl:

Thank you, Michelle. Good morning everyone and thank you for joining us for our second quarter 2023 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules to the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to Internal Revenue Growth, or IRG, from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the second quarter of 2022. Net income, EPS, operating EBITDA, and margin and operating expense and margin results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operation. These adjusted measures in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today. To hear a replay of the call access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on July 26, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now, I'll turn the call over to WM's President and CEO, Jim Fish.

John Morris:

Thanks, Jim, and good morning. Pricing remained a bright spot in the second quarter as we continue to execute on our revenue management programs to recover cost increases and improve margins. Our second quarter organic revenue growth in the collection and disposal business was 6%. This growth was led by core price of 6.9% with collection and disposal yield of 5.8%. We have and continue to emphasize the importance of post-collection pricing, and in Q2, we delivered a yield of 7.5% at our transfer stations and 6% for landfill MSW, both improvements in the growth rates from last year. Our team's collective focus continues to be on maximizing customer lifetime value. That focus led to second quarter churn improving to 8.3%. This lower churn has allowed us to convert more core price into yield, driving our full year outlook for collection and disposal yield to increase to more than 5.5%. Looking at volumes. Second quarter collection and disposal volume grew by 0.2%. As expected, volume growth was weighted to the landfill line of business with modest declines in the collection business. MSW volumes stood out with an increase of almost 4%. As Jim mentioned, some of our event-driven landfill volumes, particularly special waste tons have been tracking below our expectations and below the very strong levels we saw in 2022. Our collection volumes were down modestly in the quarter due to the intentional steps we continue to take to price every contract to achieve acceptable returns as well as the impact of lower volumes from temporary roll-off. Net new business and net service increases were firmly positive and improved from first quarter 2023 levels, underscoring that commercial conditions remain solid. Though collection volumes are down, both revenue and operating EBITDA grew in each line of business, demonstrating that we are prioritizing profitable volume growth. For full year, we continue to expect collection and disposal volumes to be flat at the midpoint of our guidance. Turning to operating expenses. We realized benefits from our optimization efforts in the second quarter, leading to 20 basis points of improvement in operating expenses as a percentage of revenue to 62.2%. The improvements that we made in Q2 are being partially offset by higher cost due to inflation. While we experienced some impact of lingering inflation into Q2, signs of easing continued as the quarter progressed. The areas experienced the most pressure are labor costs and repair and maintenance costs. There's cause for optimism in both of these categories. Labor costs have continued to moderate during the second quarter, settling in the mid-single-digit range from the double-digit levels that we have seen over the last year. This improvement can be attributed to better employee retention as evidenced by over 50% fewer driver openings and driver turnover improving 250 basis points compared to the same period in 2022. We have robust strategies in place to optimize labor efficiency, particularly in our collection line of business, which we expect to further diminish these cost pressures as the year progresses. We are seeing the benefits of these efforts as we progress through the second quarter, with June marking the lowest cost to serve month of the quarter. This is a promising sign as we move through the remainder of the year. As noted, another significant factor impacting our operating cost has been repair and maintenance expenses. The effects of not receiving a full allotment of trucks over the last few years are still being felt. However, the good news is we are now receiving more trucks and it's leading to improved costs. Since the beginning of the year, our maintenance cost per unit have either improved or remained stable across all collection lines of business. Similar to our approach to labor costs, we have comprehensive plans in place to drive continued improvement in our repair and maintenance performance as we progress through the rest of 2023. Our efforts in these two key areas as well as broader operating expense categories give us confidence that we can continue to improve overall operating costs as a percentage of revenue as we progress through 2023. I want to thank the entire WM team for continuing to provide safe and reliable service to our customers. I know they're all working hard to deliver strong results through the remainder of this year and beyond. With that, I'll turn the call over to Devina to discuss our financial results and guidance and further detail.

Operator:

[Operator Instructions] Our first question is going to come from the line of Tyler Brown with Raymond James. Your line is open, please go ahead.

Devina Rankin:

Yes, you're right, Tyler, there are a lot of moving pieces. Similar to what we talked about in the first quarter, when you combine recycling and renewable energy prices that had a negative impact to margin of about 30 to 40 basis points, again, the dilutive impact of M&A, this is half recycling and half solid waste was about 40 basis points. And then what we had is an offset from fuel that you didn't see in the first quarter. So we're really pleased that when you look at those two things which are more timing and commodity related and focus on the real substance of the margin expansion that we produced in the quarter, that is two things, and its solid waste and it is SG&A cost optimization.

Devina Rankin:

Exactly.

John Morris:

So Tyler, I'll start, and then I'll leave the second part to maybe to Devina. But I would tell you that when I look at probably the best barometer for that inflation question is probably labor. I think the good news, as you heard in my prepared remarks, it continues to moderate. We came down, I think we were right around 6% for the quarter, which is obviously a tad higher than what we had projected in the number that you referenced. But I think the good news is, is that we continue to see that moderate and it continue to moderate through the quarter as we looked at each of the progressive months as we're anniversarying some of the peak labor increases. The second part would be on the M&R side. And as you heard also in my prepared remarks, the good news is that we're on track to receive about 90% of our trucks this year as opposed to less than half the last few years. So that's another place where we've seen a little bit of persistence in inflation. But as evidenced by my commentary and Devina's, we feel good about the balance of the year and our ability to continue to drive OpEx down.

Tyler Brown:

Excellent. Very good. And then my last one, real quick. So Jim, it sounds like the $740 million of incremental EBITDA from energy recycling is intact. You did mention that the timing may fluctuate, and we did have the $200 million CapEx deferral. So at this point, how much incremental EBITDA are you expecting in '24 from those? If I look back at the Investor Day, it was something like $225 million incremental. Is that still the case? Or has that been pushed out a little bit? Thank you.

Tyler Brown:

Okay. That’s helpful. Thank you.

Toni Kaplan:

Thanks so much. You mentioned that collection and disposal will exceed 5.5% this year. We did see a little bit of a decel in 2Q. Can you just talk about what should cause that to sort of accelerate from this level?

Toni Kaplan:

Terrific. I wanted to ask a little bit more on the SG&A optimization. Thanks for calling that out. Just any additional color on what's going on there and how much maybe you have left to do with regard to that?

Toni Kaplan:

Terrific. Thanks a lot.

Bryan Burgmeier :

Good morning. Thanks for taking the question. Just following up on Tony's question, so there's a comment in the press release and prepared remarks about exceeding yield growth of 5.5%. So what level of yield growth do you assume at the midpoint of your revenue guidance now? Is it 5.5%? Or is that above 5.5%, any detail you can have on kind of what's baked into the guidance would be great.

Bryan Burgmeier:

Got it. Got it. Thank you. And I appreciate the updated view on the recycled commodity basket. Can you maybe just provide some detail on what the average was during 2Q or maybe where you are in June, July? Just trying to think about how much improvement we need to see in the second half? Thanks.

Tara Hemmer:

Excellent. So our commodity price for recycling for Q2 was $60. And I think what you have going on in the second half of the year is really a tale of two different commodity types. If you think about our fiber pricing, we're expecting a slow ramp in fiber pricing, and that's really being driven by some mill capacity coming online domestically. The bigger story really is on the non-fiber pricing and related to plastics, which is a smaller part of our volume, but higher-value commodity. And we've seen prices decline roughly 30% to 55% from May to July. So that's what's driving our recycled commodity price outlook for the second half of the year. And so we're expecting the second half of the year to now be about $60 a ton. So really the same as Q2.

Operator:

Thank you. One moment please. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open, please go ahead.

Devina Rankin:

Yes. So we look at that as a $40 million -- what I would say is we were expecting about an $85 million headwind from commodity price impacts in the recycling and renewable energy businesses. That's now expected to be more like $125 million at the midpoint. So about a $40 million headwind relative to initial expectations, with half of that in the front half of the year, and that's related to the renewable energy businesses. And really specifically in electricity and nat gas prices specifically. And then on the back half of the year, as Tara just articulated, pressure from recycling commodity prices, particularly plastic being lower than our expectations, which is causing a $20 million decline in the back half of '23.

Jim Fish:

No, I think you're right on there, Michael. I mean, I think if we had a crystal ball and said, "Hey, commodity prices are not going to improve the way we thought they would in the back half of the year." If we know that natural gas pricing was going to come down significantly, which we didn't expect that our electricity would come down or even rent pricing would come down in the front half. Obviously, it's improved in June. But I think if we had known all those things, clearly, we would have given lower guidance than we gave. But still, as I said in my prepared remarks, and we're still coming in at 5.7%, which is in that range of 5% to 7% EBITDA growth. And by the way, when we gave that back in 2019 that assumes average commodity prices. We are 45%, 40% under average commodity prices. So I walk away from this quarter -- well, initially -- and I'm not going to sit here and tell you I wasn't disappointed when I first looked at the numbers. But then I start looking at what we're controlling and thinking, gosh, normally, when you crush it on SG&A and pricing and margins. Normally, that's a beat and raise. Why are we having the lower and it's all what we've just been talking about. It's all these commodity-based things that are sometimes hard to predict. And we used history to predict, for example, commodity price rebound. It's going to come back. It's just going to be 2024 now. So I think you're absolutely right. The guidance would have been lower, still would have been within the 5% to 7% range. But I walk away feeling pretty good about things. I might sound crazy today, but I walk away feeling good that we're -- that those things that we're controlling, we're doing a darn good job of it.

Jim Fish:

Yes, that's right. I mean actually, I would say, you could argue a little better, right? Devina just talked about SG&A being 9%. I'd tell you, when I was CFO, I mean, I'm sitting there wondering how we get to 12.

Jim Fish:

Yes, she is way better at this than I was.

John Morris:

So two things, Michael. First, the answer is I don't think no, we're not. I would tell you that on the hurricane piece, I mean, when we look back, that was a little bit of a headwind in the first half of the year, a little bit more in Q2. But again, when we were predicting what we're going to do back last year with respect to Ian, we've cleaned up a lot of it. It just moderated a little bit more in the first half and a little bit more in the second half. So that's answer number one. I think on the special waste side, I've done a little bit of a lot of homework on this and talk to the team here. I would tell you, no, I don't think we're below the baseline. I think what we saw is historic highs in the first two quarters of last year in special waste, and I'm going back until 2017, I think, is as long -- those are two of the strongest quarters we've had. In fact, Q2, I think, was our strongest quarter in recent history for special waste, so no. And really, it was a handful of events, a little bit in the Rust Belt, we saw a little bit of moderation on some really big projects. But when you look outside of that, I'm pretty confident about what's going on in special waste.

Michael Hoffman:

Okay. And then Tara, how does the delay -- and you may have answered this, but so much information was given I missed it. How was the delay in spending impact capturing the ITC since such time sensitive?

Michael Hoffman:

And then what is the probability that you can work it up from 30% to 50% based on content and all that stuff?

Michael Hoffman:

Okay. So that's another upside pleasant thing. Instead of spending $1.2 billion, you're going to spend anywhere from $700 million to -- $500 million to $700 million.

Michael Hoffman:

Okay. Cool. And then, Devina, if you said it, I missed it, what was the impact of less pass-through fees on margins?

Michael Hoffman:

Okay. And then what are the chances we might get segment reporting with more details just this is a learned experience from what happened this quarter?

Michael Hoffman:

Terrific. Thank you so much.

Noah Kaye:

Thanks so much. I'll pick it up there on the sustainability investments. And to be clear, permitting delays are absolutely nothing new in the RNG industry, and I think we understand why. But I'd be curious for your color on the development environment, to what extent any incremental challenges are presenting either from a permitting or construction perspective? How sort of temporary do you view this in this growing industry?

Noah Kaye:

Okay. And just a follow-up around the RIN assumptions for the full year. Obviously, for the first half of the year south of the original guide, kind of low 2s, RINs being north of $3 now. Is there some sort of impact to the blended average for the year from hedging? If so, can we kind of tease that out? Or could there still possibly be a little bit of upside from where RINs are penciling out today?

Noah Kaye:

Okay. Super helpful. And then I guess a question for perhaps Jim and John. If you look at the disparity in volumes between MSW and the collection lines, I mean, what is the story that tells? Obviously, you went to some of the detail earlier on special waste around to tough comps in some of the pocketbook deferrals. But just looking at that disparity, help us make sense of it.

John Morris:

The only thing I would add on the front main residential well. And if you look at residential, and you saw it in the back, if you look at the 4% volume versus the revenue improvement, we've seen a similar trend there last couple of quarters, we try and rightsize that business and continue to get those margins up. On the commercial side, I did go back and looked at what printed in terms of the volume. And then you net out some of the franchise impact in addition to one national account loss we talked about that we're actually anniversarying ironically. And at the same time, putting about 15,000 containers back on the street to take that business back, we actually end up about 0.2% positive for the quarter. So there's some noise in there, and that's for the level of granularity, but I think that's why you hear from Jim and I some confidence in our answer to you.

Operator:

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open, please go ahead.

Jim Fish:

I guess based on this quarter, I wouldn't say it was conservative. I don't know. Look, I think...

Jim Fish:

I know. I'm kind of half kidding here. But look, I think the 5% to 7% that we gave in '19 is a good range. But those components that you talked about, we're feeling very confident in those. I mean, SG&A we've talked about pricing has been a very good story for us and continues to be a good story for us. OpEx, John talked a lot about OpEx today. And while we had maybe a little more stubborn inflation in the front half, we're starting to see some moderation, as you said. We're starting to see things like training hours come down. We're starting to see over time come down a bit. So we're getting efficiency improvements, cost per unit on maintenance, truck deliveries. All of those things caused us to be fairly optimistic, and Devina mentioned 29% margins as a decent jumping off point. And look, I would say, yes, that -- we've talked about 30% being a number that we felt was achievable for probably the last couple of years. Now we're finally getting to a point where we say, okay, we really do believe that. I mean, we're looking at 60 basis points of improvement in margins in the face of some really strong headwinds that were a bit out of our control. So we'll give you a lot more detail on that as we give guidance. But I would tell you that barring a big downturn in the economy that 5% to 7% still looks like a very good range for us.

Devina Rankin:

Yes, Sean, I think you're thinking about it the right way. So layering that on top of what we plan for '24 is the best view that we have right now. We'll give more clarity on that when we give '24 guidance. But based on our expectations right now, I think what's important for you all to hear is that the teams are working really hard to accelerate projects where we can because the returns on these are so strong and a three-year payback period means that we want to get these facilities up and running as quickly as possible. So while there are some places where we're seeing delays in deferrals like you said, there are others where we're working to see what we can accelerate. So right now, our best outlook is to layer the $200 million on to the prior outlook for '24.

Operator:

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open, please go ahead.

Jim Fish:

I'll give a little bit, and then I think I'll let Tara answer the rest of it. I do believe that there is plenty of demand out there. So from that standpoint, I mean, there's been a little bit of discussion I've heard that, well, are you going to kind of run up against a ceiling here in terms of demand. And I think the answer is there's plenty of demand here as we think about the natural gas fleets, for example. I mean our natural gas fleet is about 70% of routed vehicles. So I think, Tara, I'll let you kind of give a bit more detail. But I feel optimistic about the demand side of this.

Jerry Revich:

And to that point, given the visibility on a multiyear basis, how are you focusing about the pipeline beyond the initial 20 projects as a result? And are we looking at potentially accelerating the next batch of projects beyond these lines?

Jerry Revich:

Super. And can we just shift gears, Devina, I just wanted to ask just to make sure I'm on the same page with you. If I'm looking at the second quarter results from a top line standpoint and apply normal seasonality in the 270 D3 RIN and current OCC prices to the back half of the year, I would get towards the high end of your revenue range. So I just want to make sure I'm not missing any headwinds or any differences versus normal seasonality that could drive you towards even the midpoint let alone the low end of the range. Are there any moving pieces that we need to keep in mind?

Jerry Revich:

Okay. And then can I ask a similar question from margins. Normally, your margins are up 0.5 point 3Q versus 2Q. This year, we're going to have the higher D3 prices and OCC prices as well that could maybe 0.5 point to that? Is that how you're thinking about 3Q versus 2Q or anything else we need to keep in mind in terms of the margin cadence?

Jerry Revich:

Got it. Thank you.

Hans Hoffman :

This is Han Hoffman on for Stephanie Moore. I was just wondering if you could comment a bit on pricing just in terms of where you're kind of exceeding relative to kind of your internal expectations. And then just anything you're seeing from a churn standpoint?

Hans Hoffman:

Got it. That's helpful. And then could you just maybe comment on the M&A environment just in terms of how valuations look like? And any change in activity level there?

Operator:

Our next question comes from the line of Tobey Sommer with Truist. Your line is open, please go ahead.

John Morris:

So Tobey, I think a couple of things I'll note for you. One, I referenced that labor rates trended at about just over 6% for the quarter. And if you go back a year ago, that was probably 9%, 10% depending on what part of the country you're looking at. So it moderated. We had expected it maybe to moderate a tad more. But I think what you heard from all three of us is that we have good momentum on the OpEx side and in particular on labor. What's driving that is there a couple of things we've all commented on, which are driver turnover is down 250 basis points. And why is that significant? It takes a lot of the cost friction out from the labor line. And we're seeing it not only in our quality of service and our safety results, but on a labor cost per unit, we're continuing to see that trend down. And then when you think about kind of where we are first half to second half and when Devina added some color on about what kind of the exit margins look like and what the exit OpEx margins look like. You're seeing that momentum build in the second half of the year and helping us build into momentum for 2024.

Tobey Sommer:

I appreciate that discussion. What kind of rate in underlying comp growth is there taking the turnover, the hiring, training kind of out of the equation?

Tobey Sommer:

Yes. So what is your compensation growth for sort of -- maybe you could take a look at your existing employees? Like what's the underlying trend there as opposed to your training and hiring costs?

Jim Fish:

I think this is -- part of this was the emphasis behind looking to take positions out through technology, not take them out but not choose to replace them because there is a concern, and there has been for three or four years now that this labor pool is shrinking particularly on the trade type positions. And John talks a lot about that. But that's why just in '22 and '23, there's 1,500 positions so far that we've chosen not to replace. Most of those, as Devina said, are on the customer experience side, through adding technology, our call volume is down significantly in customer experience. But there still are a number of those left. We said kind of 5,000 to 7,000 positions. So at the low end of that 5,000 over a period of a couple of years. John has some operating positions to take out as he moves from traditional rear load equipment, for example, to automated side loaders. Obviously, a rear loader has a person on the back. And not only is there an added labor component there, but there's a safety issue, too. It's much more dangerous to be on the back of a truck than to be sitting in the cab operating a joystick. There are -- we've taken out only 100 of those so far, really having to do more than anything with truck deliveries. But there's another 400 that are geared up and ready to go as soon as those trucks come in. And I think over the next couple of years, you could see something north of 1,000 that we take out, not only do you get a person off the back, but you also get a 25% or 30% pickup in productivity.

Jim Fish:

But all of these reduce that risk that you're talking about, which is this kind of inflationary risk on labor.

Jim Fish:

No, I mean that's -- look, I think what -- I guess my point was, you're starting to see some of these valuations creep up. And so really my primary point was we're going to be disciplined about that. I mean, particularly as you think about these investments we're making in RNG and recycling, I mean, if you put a multiple on that, it's a multiple of three or four compared to a multiple -- anything in double digits seems to not make sense compared to those. So it doesn't mean we're not going to do acquisitions. But I think we're going to be disciplined about how we go about that, particularly when it comes to some of these higher multiples.

Operator:

Our next question comes from the line of Stephanie Yee with JPMorgan. Your line is open, please go ahead.

Tara Hemmer:

Sure. If you look at what's happening with plastics, it really comes down to the virgin price for plastics is low, which is putting pressure on the recycled pricing. But we think long term, if you think about what's happening with brands, they all have commitments to buy recycled content, and we think that will come back, they are going to come back into the market to buy to meet their commitments. So we would expect that we would see a ramp longer term. It's one of the reasons why we're excited about some of our investments that we've made in plastics recycling and advancing those. And it's one of the things that our automated recycling plants do. They help capture more plastic, which will go to those markets longer term.

Devina Rankin:

Yes, it's a great question, Stephanie. I think the way that we're looking at that is not a specific yield number, but instead the spread between our yield and our cost inflation. And what we're really satisfied with is that we've seen flexibility in our pricing programs to be responsive to different cost environments. And so whether the yield in that initial guidance in 2019 was 2% or we're closer to the 5.5% today. What we're focused on is ensuring that we get the right spread from optimizing the business as well as continuing to price to cover cost inflation for long-term growth.

Operator:

Our next question comes from the line of Jim Schumm with TD Cowen. Your line is open, please go ahead.

Devina Rankin:

We are expecting that there will be an increase in the overall program, but because of the size of the program and the multiyear nature of executing upon it, we are going to wait to give specific updates with regard to the magnitude of that. It's difficult for us to update this a quarter at a time. And what we look to do is ensure that we give you clarity as we have significant or any meaningful revisions in near-term outlook and the most material one that we have at this point is just the shift of the $200 million from '23 to '24. Everything else is quite inconsequential to the overall outlook at this point.

Tara Hemmer:

On the equipment side, we did a good job in particular on the R&D side of making sure that we really procured our longer lead time items and those critical components related to our build. So we feel good about that. One of the things that we've been watching on both sides is really electrical components. And so the team has done a good job of getting out in front of that. Those tend to be a year out lead time like items and then working in close coordination with the pipeline and then electrical interconnect, and those are typically very local in nature and very site specific. So we've seen some issues here and there that we're trying to navigate through. And again, this is a pretty normal course when you think about what we're trying to build and the scale and the size of our portfolio.

Operator:

Our next question comes from the line of Kevin Chiang with CIBC. Your line is open, please go ahead.

Tara Hemmer:

Yes. We'll provide greater detail in the future once we have a bit more clarity from the IRS, but we feel confident in those ranges.

John Morris:

Jim said it last quarter or the quarter before, trying to expand margin when inflation is 8%, 9% is not ideal. So as we see inflation tick down and CPI is probably a good example of that. We don't -- we see our ability to grow margin, obviously, get a little bit stronger as inflation comes down. Secondly, CPI, obviously, is tailing off. I look at that two ways, 1 of which is the cost side, which I commented on. The second piece of it is as you look back on a lot of our index price contracts. We've still got a bit of a tailwind and we talked about that when we gave guidance of about 5.5% conversion rate there. So -- and lastly, I think whether it's been an inflationary environment, high CPI, lower CPI, if you look at our historic pricing strategy, we've priced to get margin on top of operating expenses regardless of what's happened on the CPI side.

Operator:

Thank you. And I would like to turn the conference back over to Jim Fish, President and CEO, for his closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.

Ed Egl:

Thank you, Tawanda. Good morning everyone and thank you for joining us for our first quarter 2023 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release, and the schedules to the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K. John will discuss our results in the areas of yield and volume, which unless otherwise stated, are more specifically references to Internal Revenue Growth, or IRG, from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the first quarter of 2022. Net income, EPS, operating EBITDA, and margin and operating expense and margin results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operation. These adjusted measures in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today. To hear a replay of the call access the WM website at investors.wm.com. Time-sensitive information provided during today's call, which is occurring on April 27th, 2023, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now, I'll turn the call over to WM's President and CEO, Jim Fish.

John Morris:

Thanks Jim and good morning. 2023 has started off as planned and we're pleased to have achieved our first quarter targets. Overall adjusted operating EBITDA grew nearly 4% and operating EBITDA in the collection and disposal business grew 7% in the quarter. One area that exceeded our expectations was pricing as we continue to execute on our revenue management programs to recover cost increases and improve margins. As Jim mentioned, our first quarter organic revenue growth in the collection and disposal business was 7%. This growth was led by core price of 7.4%, which exceeded both last year and our plan for the first quarter. This strong core price translated into collection and disposal yield of 6.2%, a 70 basis point improvement compared with Q1 of 2022. We saw strong yield performance across all lines of business and are particularly proud of our post collection yield. We have consistently emphasized the importance of post collection pricing and in Q1, we delivered yield of 8.9% of our transfer stations, and 5.4% for landfill MSW, both increases from last year. In fact, the transfer station yield is a new high for that line of business, which is helping to offset, increasing cost of labor and transportation. Our collective focus continues to be striking the right balance between maximizing customer lifetime value and increasing price to recover higher costs. We remain confident that we can achieve our full year pricing expectations for core price of 6.5% to 7% and yield approaching 5.5%. Turning to volumes, first quarter collection and disposal volume grew 0.8%. Landfill volumes led the way with C&D volumes up almost 37% in the quarter, driven by the hurricane cleanup in Florida and MSW volumes increased by almost 3%. Special waste volumes moderated in the quarter due to the timing of event-driven work, but our pipeline remains robust, and we believe that those volumes will provide incremental revenue growth as we progress through Q2 and the balance of the year. Our collection volumes were down modestly in the quarter, driven by intentional steps we continue to take to price every contract to achieve acceptable returns. This has led to some non-regrettable volume losses in our residential and commercial business. With profitability improving in each line of business and contract wins with healthy price increases, we're pleased to see our differentiated service and disciplined approach to yield benefits. For the full year, we continue to expect flat overall volumes at the midpoint of our guidance. Turning to operating expenses, which increased 70 basis points as a percentage of revenue to 63%. I want to frame these results and then talk about the efforts in place to optimize our cost to serve in 2023 and over the long-term. There were two primary contributors to our first quarter results, the dilutive impact of recent acquisitions and continued inflationary cost pressure. As a reminder, we closed on about $365 million of acquisitions of solid waste and recycling businesses in the second half of the year. Integration costs and upfront dilutive margins of these acquisitions had about a 35 basis point impact in the quarter. While this impact was a little more than expected, overall, we're very pleased with the progress being made on creating value from these businesses. The remaining impact was due to persistent cost inflation, which was most significant in wages, repair and maintenance and subcontractor costs. The good news is we see signs of easing cost pressures and the steps we are taking to combat higher costs are also showing benefits. Frontline wage increases are now in the mid-single-digit range as compared to the high single to low double-digit increases that we saw in late 2021 and 2022. And we're starting to see truck orders fulfilled, which benefits every aspect of our cost structure because employee engagement is better, downtime on route is minimized, repair costs to reduce, and expensive rentals can be eliminated. Getting trucks delivered will also be key to residential automation. As we move from traditional rear load to automated side loaders, we're taking a helper off the back and getting about a 30% productivity pickup, which equates to lower driver technician and truck capital needs. We talked a lot about the work we're doing to optimize our cost to serve. Investments we are making in our people and processes are also important. We're always working to make WM a great safe place to work and delivering our team members of best-in-class compensation and benefits package. One of the benefits we know that comes from these efforts is improved retention, which then translates into even better customer service and optimized cost structure because our tenured drivers are the safest and most efficient. In the first quarter of 2023, we saw the best driver retention we've seen in two years. This positions us to drive down our training and overtime hours, improve overall efficiency, and most important, see continued improvement in our safety performance. In closing, I want to thank the entire WM team for the fantastic job they do safely and reliably serving our customers day in and day out. We've had a solid start to 2023 and look forward to building on our success. I'll now turn the call over to Devina to discuss our financial results in further detail.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Bryan Burgmeier with Citi. Your line is open.

Devina Rankin:

Yes, it's a great question. We definitely see the lion's share of that contribution of EBITDA margin coming in the third and fourth quarters. We do expect some improvement from what we saw in the first quarter. I want to point out a couple of things that happened in Q1 that we don't see as indicative of the margins that we'll expect for the remainder of the year. As I mentioned on the commodity businesses, that was 50 basis points of the impact in the quarter. We expected our first quarter to be the hardest comp on a year-over-year basis from commodity prices, and so we think most of that impact starts to abate beginning in Q2. But as I said, most of that really comes in Q3 and Q4 when the year-over-year comparisons on commodity prices improve. On the dilutive impact of M&A at 40 basis points, that was about half solid waste and half recycling. And like I said, we're pleased with the traction that we're seeing in each of those businesses on the recycling side because that business is in a development phase. We knew that there would be some upfront costs associated with integrating that business. They just happen to be higher than our expectations. We don't expect that to continue over the remainder of the year. So, that's another thing that gives us confidence. On the solid waste side, we took a really important step that's team member-focused and an investment in our frontline by making the MLK holiday across the entire organization. That emphasizes our focus on people first, but that is a Q1-only event, and that's something else that will abate for the rest of the year. So, those are the things that give us confidence that the Q1 results of 40 basis points will exceed what you see for the remainder of the year. And in fact, we do see some of that coming out in Q2, but Q3 and Q4 is really where you start to see some strong results.

Jim Fish:

Yes. Bryan, we are still looking to see $70 for 2023. The trend has been good and it's what we anticipated. So, at the end of Q4, we were at $47. Q1 was at $54, but it got better as you went through the quarter. So, $57 was our average in the month of March. And then as we're getting into April, we're seeing that continue to improve. Couple of things are helping us. The mill capacity that's coming online is helping with demand on the back end. We're also seeing a pretty significant uptick in pricing for plastics, for aluminums and a little bit for OCC. So, we are still sticking with our $70 and feel pretty confident in that.

Toni Kaplan:

Thanks so much. You mentioned in the prepared remarks, getting the additional truck orders fulfilled and that getting more back to normal. How quickly can we see that productivity impact into your results? And could that be upside to the guidance for this year? Or is that already embedded in the guide, that it returns to more of a normal trend?

Toni Kaplan:

Great. I wanted to just ask my follow-up on the sort of more recent, like April, late March trends. Have you seen those improving? Or has there been any change? Obviously, the banking crisis sort of doesn't impact your business as much as some of the other business services companies. But any heightened recession concerns with your customers? Like any change in conversations that you're having with customers? Thanks.

John Morris:

I think on the cost side, Toni, I addressed the M&R and some of the challenges we have seen here. The good news is we're starting to open up. On the labor front, I said in my prepared comments, we were close to high single, low double digits, and that's moderated back down to mid-single-digits. So, that certainly is a benefit going forward throughout the year. Subcontractors, we're still seeing a little bit of lag there, and it's really more of third-party transporters. But as you saw within our post-collection pricing and more specifically our transfer stations, we continue to address that through the revenue quality of the remote gates at or the transfer station. I think -- when it all comes down to it, I think we talk about automation and optimization. It's really about permanently lowering our operating expense exposure. And that's really, as Jim mentioned, what we're really focused on for the balance of the year.

Operator:

Thank you. Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Jim Fish:

Good morning.

Devina Rankin:

Yes, it's a great question, Jerry. And that's some of the analysis we've been particularly honed in and on and looking at. And that is our expectation, is that the first quarter of 2023 had some margin pressures that we see as more related to 2023 specifically, such that the normal seasonal uptick that we see from a revenue perspective will provide the typical expansion. And then on top of that, we'll have some added benefits from lapping some of the commodity price impacts I've talked about. We're also expecting to see some strong accretive revenue come back in the collection line of business, in particular as our differentiated service model really pays some dividends in terms of our national accounts business where we are going to lap some of the contracts' expirations and we're going to see some contracts return. So, those are the things that give us so much confidence that Q2 really will be outsized relative to a typical year.

John Morris:

Yes, Jerry. I would tell you that's something we've been working on, and that's been a tougher hill to climb, obviously, because those are bigger chunks of a volume and big customers when you're making those decisions. I think as I mentioned, the transportation piece, and a lot of that is labor and fuel, if you will, has continued to persist, which is why one of the reasons why you continue to see us be as aggressive as we are on the transfer station side. And on the landfill side, again, the cost of constructing and operating as landfills is not getting cheaper. So, part of our pricing strategy, obviously, a minimum to recover our investment there, but also look for margin improvement where that opportunity exists.

Jerry Revich:

And Jim, just one last one, if I could. SG&A has obviously been a big focus for you, and really strong cost control this quarter. Can you talk about, did we get a full quarter run rate out of the initiatives that you mentioned on the call center side this quarter? Or is that momentum building over the course of the year?

Jerry Revich:

Very interesting. Thank you.

Tyler Brown:

Hey good morning.

Tyler Brown:

Hey Jim, John, just I was looking back through the Q4 transcript, and I'm not really sure I saw it. But can you just kind of remind us what is embedded -- or the level of unit cost inflation that's kind of embedded in the 2023 guide and maybe where are you today?

Tyler Brown:

Right. Okay. So, that kind of naturally slopes down. So, look, Jim, I don't want to get into the comparison game, but one of your competitors showed core pricing accelerated in Q1. It looks like your pricing may be peaked in Q4. I get that there are a variety of factors at play. But I've got a lot of questions this morning. But just any thoughts on the pricing environment, your go-to-market strategy? And do you just feel comfortable that you can maintain a nice positive spread to unit cost inflation both over the short and long-term?

Tyler Brown:

Okay, perfect. And then my last one, I got to kind of go back over this margin walk, there's a ton in there. So, make sure I've got it. So, commodities and RINs were a 50 basis point headwind, M&A was about a 40 basis point headwind. You mentioned something -- I think you said 30 basis points from a fuel tax credit. I was unclear, is that a hurt or help. And then you mentioned in higher incentive compensation, I wasn't sure if you were talking cash flow or EBITDA. And then is the holiday addition about a 50 basis point headwind as well as I would assume it's kind of like one less workday?

Jim Fish:

And it was not -- there wasn't one less workday. We still had to work those days. It's just we paid everybody time and a half.

Devina Rankin:

Thanks Tyler.

Michael Hoffman:

Hey WM, how is everybody today?

Devina Rankin:

Hey.

John Morris:

So, the service interval piece, Michael, is still positive. That's the headline. In addition to the service intervals, though, as Jim mentioned in the commentary a few minutes ago, the other parts of that, that we're really paying close attention to is what the churn rate is doing and what the rollbacks are doing even as we continue to be aggressive on the pricing side. And those have all continued to stay static and in a good spot and service intervals are still positive. So we feel good about that.

John Morris:

So, this is anecdotal, Michael, but we did our business refused with all our areas last week. And one of our areas actually was scheduled to return some rental trucks which, as you can imagine, are done at a premium. And we were told, hey, your trucks are going to be -- and it wasn't a large amount of trucks, less than a dozen trucks. But this area turned their trucks back in and then we got delayed another 30 or 45 days on some of the delivery. So, to Devina's point, there's a little pensiveness by the field, and we understand it's to send those trucks back, whether it's rentals or surplus assets. The good news is, like we said, there's almost 500 trucks that are on the ground, not in service yet. So, when we think about rentals and surplus assets, we have a clear path for the rest of the year and more confidence in the delivery schedule that we're going to be able to take those out.

John Morris:

I don't know, Michael, we've seen a meaningful movement there. I would tell you, we don't talk about weather, but there was a handful of areas on the West Coast where we were shut down for a few days and some kind of really odd weather. But other than that, it's been -- I think the temp story has been a consistent one.

John Morris:

So, we've said, Michael, about 40% of our revenue is indexed. It's not all CPI as we've talked about. The majority of that, though, really, as we all know, runs through that residential line of business. And that's when you look at the pricing and the yield results in residential, I think for the quarter, we were up $53 million in revenue. We're down about 29 in volume. So, we continue to down that path until we get to some acceptable spot there. And it's noteworthy that the residential line of business, as you can imagine, is one that eats a little more of the inflation, some of the other one due to the labor intensity and whatnot. But if you look at where CPI was last quarter or this quarter, you look at core price and yield, we're still pricing above that. So, we're getting traction even above that CPI number.

Devina Rankin:

Yes, you're right, Michael. About 70% of our resets are in the first half of the year, and those are all indexed to a year ago activity. And so we'll see some of that benefit as we go through the rest of the year in terms of where inflation headline numbers continue to be high.

Jim Fish:

I like the way you said that, Michael. I was trying to figure out a good way to say that. You said it better than I would. But you're right. I mean, it's -- in any big business, there's going to be a few things that work in our favor, a few things that work against us. RIN pricing is probably a little bit against us right now. We budgeted $2.30, and it's $2. So, that one may end up being a little bit of a headwind. But we've also gone through some of the tailwinds, too. I mean SG&A, is -- I'm not sure we've ever had an SG&A number as a percent of revenue below 10% for the first quarter because the revenue base is always low for Q1. So, we're doing a better job on SG&A than we actually anticipated. I could say the same thing about MSW volume or a couple of the other things. So, you're right. There's a few things that are coming in a little lower than our expectation. RIN pricing would be one of those. On the other side, recycle pricing, as we talked about a little bit earlier, is right on our expectations. So, we're pleased with that because I know there were a few that had questioned our $70 number, and that looks like it's probably going to hold. So, I think you're right about the fact that there's a whole bunch of pieces in play here.

Jim Fish:

I think it will continue to close. And I said it a little bit earlier, but there's a real appreciation for the fact that especially landfill airspace is a precious commodity. Particularly when you think about it on the East Coast and on the West Coast, I mean, maybe not quite as much in the middle of the country, but definitely on the East Coast, I mean, you see it. Anybody who lives in New York sees it, anybody who lives in Boston sees it. And I'm not sure we've priced it that way over the years. You're seeing us price it that way. We recognize that these have a finite life to them. And so why fill them up with kind of low-priced tons when we can fill them up at a slower rate, maybe at higher price tons, preserve some of that airspace. Give us time to figure out our solution once those do ultimately go away.

Jim Fish:

Thanks Michael.

Kevin Chiang:

Hi, good morning. Thanks for taking my question here. Maybe just on -- in your prepared remarks, you talked about the MRF you opened in Toronto here. Just wondering how that positions you given the province -- if Ontario is looking to put in a producer responsibility legislation or as producer responsibility legislation? Does this MRF make you more competitive as you think of the opportunities stemming from that legislation?