Waste Management Inc (WM) — Q4 2019 Earnings Call Transcript

Thank you Jay. Good morning everyone and thank you for joining us for our fourth quarter 2019 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, Senior 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. 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 of 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. We'll also be providing our outlook for 2020. This outlook does not include the impact of our planned acquisition of Advanced Disposal Services Inc. which we may also refer to as ADS. Once we complete this acquisition we plan to provide an updated outlook. All such 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. Jim and 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. In addition, beginning in the fourth quarter of 2019 we updated our calculation of core price. With advancements in technology we collect additional transactional customer-level data which provides us improved clarity of the impact of our pricing activities. While this does not change the year-over-year core price performance results, the new measure reflects a more precise calculation in evaluation of our revenue change. Please refer to the press release tables where we have provided two years of quarterly core price data using the new methodology. During the call Jim and Devina will discuss our earnings per diluted share which they may refer to as EPS or earnings per share and it'll also address operating EBITDA which is income from operations before depreciation and amortization. Any comparisons unless otherwise stated will be with the fourth quarter of 2018. Net income, EPS, operating EBITDA margin, operating expense, and SG&A expense results have been adjusted and projected 2020 measures are anticipated to be adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations including costs incurred in connection with the pending acquisition of ADS. In prior quarters the adjustment for ADS included the reduction of common stock repurchases from planned levels. We are no longer adjusting for this. 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 one p.m. Eastern Time today until five p.m. Eastern Time on February 27. To hear a replay of the call over the Internet access the Waste Management website at www.wm.com. To hear a telephone replay of the call dial (855) 859-256 and at a reservation code 9977058. Time-sensitive information provided during today's call which is occurring on February 13, 2020 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 Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO Jim Fish.

Thanks Ed and thank you all for joining us this morning. We're proud of how Waste Management performed in 2019. We continued our focus on optimizing our traditional solid waste business, developing our people, and investing in technology to better serve our customers and we're confident these are the right focus points to deliver long-term growth for the company. The results are evident in our full year top line growth which was 3.6% despite a negative $318 million drag from commodity prices in our recycling line of business and a negative $23 million swing from the sale of renewable energy credits. Landfill pricing was one of the bright spots in 2019 and is also a great example of what the Waste Management organization can achieve when we have a shared focus. Together the team achieved our best ever full year landfill MSW pricing in 2019 as we exceeded 3% MSW yield in every quarter with each quarter surpassing the previous one culminating in fourth quarter MSW yield of 4.5%. We expect to continue to drive improved MSW pricing for the foreseeable future as our price increases keep pace with the increasing costs at our landfills, but we won't just focus on MSW pricing. We're pricing all our lines of business to ensure that we generate appropriate returns on invested capital including our recycling and residential lines of business. John will share more about our 2020 plans for those two areas. The strong revenue growth that we generated in 2019 translated into robust operating EBITDA. Our collection and disposal business saw operating EBITDA grow by 8.5% and operating EBITDA margin expanded by 70 basis points both of which were better than we expected when we gave guidance at the beginning of the year. In 2019 our overall operating EBITDA grew by 4% despite lower-than-expected market prices for recycled commodities and renewable energy credits. We also produced $4.40 of EPS in 2019. We're forecasting another record year in operating EBITDA in 2020 with growth of 5.2% at the midpoint of our guidance range. We expect to achieve this growth from continued strong performance in our collection and disposal business through a combination of price, volume, and cost controls. Last quarter I spoke of the lack of visibility in our special waste pipeline as we were seeing hesitation from some industrial customers in committing to event work. I'm pleased to report that we're seeing more companies commit to event work so far in the first quarter and concerns of a recession around the industrial economy have mostly abated. We've been awarded a large coal combustion residual remediation project starting this spring. With our well-positioned asset network and expertise, we have developed a strong reputation in managing all aspects of these clean closure projects. We expect that our differentiated service offerings will result in additional jobs throughout this year. Turning to free cash flow. We've said operating EBITDA is the best reflection of the health of our business and provides the foundation for generating free cash flow. 2019 was no exception as our robust operating EBITDA once again translated into exceptional free cash flow. We allocated more than $1.1 billion of that free cash flow to shareholder returns, growing our dividend for the 16th consecutive year. We also spent $527 million on acquisitions, an indicator of the active M&A environment we're in and our ability to complete transactions at targeted returns. Devina will discuss capital allocation in the year ahead but suffice it to say that we expect to continue to reward our shareholders in 2020 by allocating a substantial portion of our free cash flow back to shareholders. On the M&A front obviously closing the Advanced Disposal acquisition is expected to be the highlight for the year. We are excited as we near the close of this transaction and we have great confidence in the potential of the combined organization. We anticipate that we will obtain antitrust regulatory approval by the end of March and close soon thereafter. We've received a high level of interest from other companies in acquiring any potential businesses we might be required to divest and we expect to complete the sale of any required divestitures shortly after the closure of our purchase of ADS. Our integration team has been working hard preparing for this close and the team is positioned to move quickly to integrate ADS operations and to achieve our targeted synergies. Overall the lead story at Waste Management and within the industry as a whole is one of consistency and predictability of earnings and cash flows resulting in excellent returns to shareholders. Devina will go through our guidance in detail but we expect that consistency to continue into 2020 where we see a highly efficient customer and employee-centric core engine driving a continuation of what we've seen for the past three to four years. When you look at our annual financial results from 2017 to 2019 and now through our guidance for 2020 you'll see revenue growth in the 3% to 4% range, EBITDA growth in the 4% to 5.25% range, and cash from operations less CapEx in the 5% to 12% range all within the bands that we've communicated over the past three years. The amazing part about our results is that we have had some challenges in parts of our business like recycling and renewable energy sales yet the core business continues to churn out earnings and cash at a strong pace. This industry and this company in particular have been a model of strong predictable results. With a very strong consumer segment of the economy and what appears to be a recovering industrial segment so far in the new year, we are confident that this rock-solid trend will continue. Lastly, I want to thank all of our hard-working team members who continue to make Waste Management both a great place to work and a fantastic long-term investment for our shareholders. With that I'll turn the call over to John and Devina to discuss our results and our 2020 guidance in more detail.

Thanks Jim and good morning everyone. We had a strong finish to 2019 and are pleased with our full year performance. Our disciplined pricing programs are delivering great results which is best demonstrated by our 2019 MSW yield of 3.8% which is a 160 basis point improvement over 2018. We will continue to price our well-positioned landfills to generate an appropriate return on invested capital in a rising cost environment. More broadly in the collection and disposal business we achieved a 2019 yield of 2.8%, the highest yield that we've seen in a decade. As we look ahead to 2020, you will see our continued focus on pricing to overcome cost headwinds and to keep generating appropriate returns on invested capital. What's impressive about these pricing results is that we were able to achieve this without compromising our volume results. We achieved 2.3% volume growth in 2019 which outpaced growth in the broader economy. However, as we expected some but not all volume growth moderated in the fourth quarter both as a result of difficult comparisons to the fourth quarter of 2018 and the timing of special waste jobs. The good news in 2020 is shaping up to be another solid year for volume. As Jim mentioned, coal combustion residuals should be a benefit for us in 2020 as we've already been awarded a job to start in April and there are additional jobs in the pipeline. The strong consumer economy and special waste pipeline combined with the positive trend in service increases exceeding service decreases gives us confidence that we'll have another good year in 2020. We plan to build upon our success in 2019 continuing to execute on our focused differentiation and continuous improvement strategies in the year ahead. The team is focused on opportunities to continue to improve and optimize our collection and disposal businesses. We plan to improve ROIC in our residential line of business and improve our overall operating costs with M 100 focused on labor technology helping to improve routing and maintenance service delivery optimization focused on repair and maintenance costs. In our residential line of business we have several initiatives underway aimed at improving profitability. This begins with the way we bid on municipal contracts. Waste Management has led the industry on return on invested capital and we're bringing in even greater attention to this metric in 2020. We're taking a hard look at each residential contract as it comes up for renewal and making sure that our bid prices and terms of service are keeping pace with cost inflation over time and changing recycling dynamics. We're also leveraging the data we continue to aggregate via our onboard technology to improve routing and the efficiency of our drivers with results in improved service and reduced costs. We expect to see similar results in the residential business that we achieved in the commercial line of business with these tools. More broadly in the collection business we're improving efficiency and capturing savings through several efforts. First, M100 or managing 100% of our drivers' day allows us visibility into our drivers' routes in real-time to coach for improved efficiency and an enhanced view of customer profitability. At our Investor Day last year we said that a 1% increase in collection labor efficiency yields $25 million in savings and that we expect $75 million of total savings from M 100 by 2021. We expect to capture the next $25 million of savings from M 100 in 2020. The other effort that will benefit our collection line of business is our maintenance service delivery optimization or MSDO. We expect to continue to lower maintenance costs as we did in the second half of 2019. This leads to improved operational performance by bringing increased standardization to our fleet as well as improved maintenance processes. These are just a few examples of the great work underway to further optimize our collection operations with the help of technology. Turning to recycling. Our recycling business performed well in light of further fourth quarter erosion in recycled commodity prices. Despite a 43% year-over-year decline in our blended average commodity price to about $37, our fourth quarter EPS contribution from recycling was only lower by $0.02. For the full year, recycling commodity revenue declined $318 million yet the business generated operating EBITDA comparable to 2018 as we were able to offset virtually all of the impact of commodity decline with an increase in fees. Our recycling performance demonstrates the success we are having in restructuring and recycling contracts to a fee-for-service model. We will also continue to make strides on improving our business through the use of technology. At our Chicago facility for the future, we expect to be fully operational by the second quarter. This plan is designed to be capable of generating high-quality material with technology through positive and intelligent sorting to generate the end product our customers require. Looking towards 2020 given the expected lower commodity price levels in the current environment we expect a minimal impact on overall results from recycling with headwinds in the first half of the year. And finally, I want to give an update on all the work we're doing to prepare for the integration of Advanced Disposal. As Jim mentioned we are approaching the close of the transaction and the start of the integration. We have developed detailed plans and are prepared to start integration as soon as we close. With the additional work that we have done since the third quarter we are confident that we will be able to achieve synergies in excess of the $100 million we laid out when we announced the acquisition. We look forward to officially welcoming the ADS team into the WM family. And with that I'll turn the call over to Devina to further discuss our financial results and 2020 outlook.

Thanks John and good morning. Our 2019 performance showcased the strong conversion of operating EBITDA from our collection and disposal businesses to cash and also our disciplined execution on managing working capital. In the fourth quarter our cash flow from operations exceeded $1 billion and grew more than 12% and full year cash flow from operations was almost $3.9 billion representing growth of almost 9%. As I mentioned earlier in 2019 with our robust collection and disposal volume growth, we plan to increase capital expenditures for the year above our initial guidance of $1.75 billion. With cash flow from operations growth that also exceeded our plan, we knew we were well positioned to proactively increase our capital expenditures and still deliver on our free cash flow objective. During the fourth quarter we spent $286 million on capital expenditures; and for the full year we spent $1.818 billion. Free cash flow in the fourth quarter was $756 million and full year free cash flow was $2.105 billion. In 2019 the most significant contributor to our free cash flow growth was strong operating EBITDA. So we also realized benefits from working capital that we expect to reverse in 2020 and lower-than-expected cash taxes. In the fourth quarter we used our free cash flow to pay $218 million in dividends. For the full year we returned $1.12 billion to shareholders comprised of $876 million in dividends and $248 million in share repurchases. In 2019 our acquisitions totaled $527 million. Our SG&A costs as a percentage of revenue were 10.3% for the full year which was about 25 basis points higher than what we planned. This difference is largely due to litigation and incentive compensation costs that were higher than expected. We remain committed to a long-term target of SG&A as a percentage of revenue of about 10%. In 2019 we were effective in managing our baseline costs while very intentionally investing in technology and our people. The investments we made in 2019 and will continue to make in 2020 support our customer and growth objectives as well as a number of the operational improvements that John discussed. Late in 2019 we determined it was prudent to make an investment in our foundational finance and human resources systems. These systems serve as a platform for almost everything we do and we have not upgraded this platform in almost 20 years. In the fourth quarter our team started this multiyear effort. You will notice that we adjusted for these costs in our press release and we will continue to adjust for the costs associated with this investment in the year ahead. Our adjusted effective tax rate was 16.3% for the fourth quarter of 2019 and 20.2% for the full year. Our effective tax rate was lower in 2019 than we expected because we realized value from the fuel tax credits, we made an incremental investment in low income housing, and we recognize some favorable adjustments when we finalized our tax returns for the prior year. Our debt-to-EBITDA ratio measured based on our bank covenants was about 3.1x at the end of the year. While this measure is trending higher as we approach the ADS closing it is within our targeted levels and positions us well to continue to execute upon our long-term capital allocation priorities of growing the business and returning cash to our shareholders. Moving to our 2020 outlook. As a reminder, our revenue earnings and cash flow guidance does not include the anticipated impact of acquiring ADS. However, it is important to note that our free cash flow guidance does include an initial estimate of the incremental interest costs we will incur for the debt raised to fund the transaction. We plan to update the remaining components of our outlook including taxes and EPS following the close of the acquisition. On a standalone basis we expect 2020 operating EBITDA to increase to $4.56 billion to $4.66 billion growing by 5.2% at the midpoint fueled by continued strong organic revenue growth. To that end we expect core price of 4% or greater, yield of about 2.5% in collection and disposal, and total company volume growth of approximately 1.5%. We expect our strong earnings growth to drive free cash flow of between $2.15 billion and $2.25 billion. We project capital expenditures to be between $1.7 billion and $1.8 billion in the year ahead which is a decrease in total spending from 2019 so at or above our long-term capital spend as a percentage of revenue target. We have seen our capital investments pay off and so we plan to continue to invest above our long-term average in 2020 with our focuses in the year ahead on landfills where volume growth is expected to remain strong and facility upgrades. We remain committed to a capital allocation plan that maximizes long-term value and total shareholder return by prioritizing organic and acquisition-related growth dividends and share repurchases. Given our focus on the integration of ADS we expect tuck-in acquisition spending in 2020 to be lower than what we have seen in the last few years and more in line with our historical target of $100 million to $200 million annually. We are pleased to be increasing our planned quarterly dividend rate for the 17th consecutive year as announced in December and expect our dividend payments to be about $920 million in 2020. Given this we currently project that excess free cash flow will be at least $1 billion in 2020. We have prudently slowed our share repurchase activity in anticipation of the Advanced Disposal acquisition. With those steps in our robust growth our balance sheet is strong and we are well positioned to restart our share buyback program. We plan to begin repurchasing shares in the first quarter and expect to allocate at least $1 billion to repurchasing our stock over the course of the year. In summary 2019 was a successful year for Waste Management and we can't thank the Waste Management team enough for all their hard work. 2020 is set up to be an outstanding year as we focus on execution both on the fundamental strength and growth of our business and on the ADS integration. With that Jay let's open the line for questions.

First question just on the just some updated color on the ADS transaction. And initially there was some enthusiasm that might be done a little bit sooner since like it's maybe taking just a little bit longer. Just wondering if you could comment on how the conversations are going and the remedy package or divestment package what kind of reception you're getting in the market for that and whether you think that might go to one person or maybe now we're in a situation where we're going to be talking about multiple buyers for that?

So Brian what I would tell you is that we announced the deal on April 14. So we're just we're not even at a year mark. And as Jim mentioned in his prepared comments we're on a trajectory we think to get clearance from DOJ right towards the end of the quarter. And obviously we're going to move to close quickly after that. In terms of the divestiture package what I can tell you is that we've had a really robust lineup of suitors kind of I said it's kind of like a line around the block of folks who are interested in these assets. So as we progressed with our conversations with the Justice Department we've obviously continued to move that process along at the same pace.

Okay. And I just wanted to ask about your comments on the residential line of business. Jim and John I think you guys both talked about how that's a focus area for 2020. As some of these larger longer-term contracts come up for renewal I guess the volumes have been a little bit light in that part of the business. I'm wondering if you could just kind of comment on where you see margins in that business today versus where they've been historically and what actions you're thinking about taking in 2020 to try and improve those margins.

Sure Brian. I think first and foremost obviously the recycling business has had a kind of knock-on effect on residential. And in my comments here and we talk about that making sure that our pricing models keep up with what the cost inflation we're seeing in the residential line of business that we're getting the appropriate returns for the capital that we're deploying there. And I would tell you that it's obviously the lowest of the three collection lines. So when we look at where we're going to direct our investments we're going to look to move those margins up here over the next handful of years.

Okay. And just last one for me. I apologize if I missed it but you just quantify the impact to EBITDA from the CNG or the fuel tax credit in 4Q and kind of what's embedded in the 2020 guidance for EBITDA?

Sure. I'll cover both the EBITDA impact and the cash flow impact. So the fuel tax credit which was recognized as a reduction to operating expenses was about $70 million in the year and we project that it'll be a little below $40 million in the year ahead. From a cash flow perspective there were no cash flow benefits associated with that. That's one of the working capital headwinds that we mentioned for 2020 and actually it created a headwind in working capital for us this year because we recognize the earnings and we'll recognize the free cash flow benefits in the year ahead. Those free cash flow benefits for both what we recognized in the P&L this year and expect to recognize in the P&L next year are a total of about $90 million.

Just the $70 million that was all in 4Q right because it just occurred late in the year right?

That's right.

So Brian, Jim here. Just to level set on EBITDA a little bit here. For Q4 and for 2019 we had quite a few puts and takes in Q4 that rolled into the final number. And by the way that's not that uncommon for the fourth quarter. But some of those puts and takes would have been in your estimates and several would not have been. So obviously the fuel tax credits that you just talked about on the positive side, the RINs pricing, recycling, all of that would have been in your numbers we've talked about a lot of that. But we also had a material true-up of our 2021 LTI plan from stronger-than-expected total shareholder return on free cash flow and we had somewhat of a clearing of the decks of legal settlements. And the total of those two was almost $40 million for the quarter and that would not have been in your estimates. You wouldn't have known about that. It was included in our adjusted EBITDA. So we included those. So just wanted to level set that there are some things in Q4 moving parts that we tend to have in many Q4s but some of them were not in would not have been in your estimates you wouldn't have known about those and that amount was approaching $40 million. So the good news though is that really the underlying business which I talked about in my remarks, the underlying business is super solid. It didn't waiver. It was strong last year and it's going to be strong in 2020.

Just focusing in on volumes down 40 basis points this quarter. It was a little bit lighter than I expected considering you guys are trending well above 2% for the year. Just curious what kind of causes inflection this quarter and if there's anything notable and then how it performed relative to your expectations going into the quarter?

Sure. Let me give you a little bit of color on Q4 and then some insight into volumes for early Q1 and for 2020 as a whole. First of all in Q4 our volume figure was indicative of a couple of things. First we knew we had the tough comps year-over-year due to the fire in Northern California and that will continue through the first half of 2020. Secondly, there we had a onetime settlement with the City of Los Angeles contract in our numbers in Q4 of 2018 and that impacted volume or at least it impacted the comparability on a year-over-year basis. Without that in 2018, commercial would have been 2.1% positive instead of 1.5%. And then the third thing for Q4 that's worth mentioning is that we saw a $22 million decline in our renewable energy and Energy Services businesses and that hits the volume line. So that gives you some insight into Q4. Here's the positive on January 1. January has come out of the gates nicely. So even with tough comps largely from the anniversary of the New York City contract, commercial volume was a healthy 3.6%, roll off was positive 2.8%, resi was down 1.3%. John's talked about that. I mean he and the ops teams are looking to fix the margins in that business. So it's not surprising that it's down a little bit. And then landfill and transfers tons were up 1% and 4.7% respectively. So that's January. And then looking past January as we will we talked about it but we've got that large coal combustion residual remediation project and we have a big national account both of those will start in early Q2. So even with the tough comps from the Northern California fires and New York City contract in the first half of the year we're very comfortable with the 1.5% volume growth for 2020 with some organic growth and by the way with the backdrop of what appears to be a pretty darn resilient overall economy.

Got it. That's very helpful. Next question just really on the guidance in terms of what assumptions are you making in terms of pricing and volumes for recycled commodity values and then also the RINs for the full year?

Yes. Kyle for recycling listen there's we finished the fourth quarter right around $37 per ton number on average and I think it was about $44 for the full year. There's been some talk of a little bit of uptick in the early part of the year on OCC. And frankly we don't have anything baked in terms of commodity uplift. What I will tell you though is in my prepared remarks what's more important is that even though the total revenue impact was over $300 million for the organization for the full year we're essentially flat. I think we're down about $2 million in EBITDA. So what we're really focused on is the commodity price is going to do what it's going to do but we're still working to make sure we continue to evolve the model to a fee-for-service model where we can generate the right returns on margins and we're moving in that direction.

And on the RINs side we were effectively kind of flat to where we finished the back half of 2019 in terms of setting our guidance for 2020. We did not take into account the significant upswing that we saw in January but we do have our eye on that and think that there's some potential value that can be created there. On the recycling front I do think it's important to talk about the fee-for-service model. And while commodity prices as John mentioned we projected to be flat. We do expect to continue to move forward with executing on that fee-for-service model and see some incremental revenue from that plan in the year ahead.

Just a quickly follow-up. If we assume RINs pricing at the January levels sort of the increase what kind of benefit do you think that would have to EBITDA on an annualized basis?

So Kyle we've looked at I mean in the fourth quarter we saw about an $0.86 per unit number. And right now in 2020 we think it could be in the one $10 to $120 range. But as you folks know that number has been all over the board and it's been a bit of a political football. But if it stays where it in that one $10 to $120 range we are going to open our fourth RNG plant this year. There could be probably $10 million to $15 million of upside if those RINs hang in that range for the full year.

I guess just from a high level I just wanted to kind of go back to the 5% to 7% EBITDA growth target you guys outlined at the Analyst Day last year. Obviously 2020 guidance came out toward the low end of that and I assume maybe part of that is maybe the tough comp on the California wildfire high-margin revenues but just hoping to get some comments on how you're thinking about that longer-term target and just kind of why we're at the lower end in 2020.

Yes. I think you've nailed it. I mean I think it is we do have tougher comps there with those wildfires. Those pretty much turned off last year at the very end of July. So we've got seven months of tough comps there. Obviously you can't predict whether there's something else that comes up throughout the year. If something else did happen whether it's a natural disaster or a big project that we don't anticipate then that would help to offset that. But for now we felt like 5.2% was a reasonable number within the previously communicated range of 5% to 7% as you say at the lower end of that but we still feel confident that we'll get there. And I think that's we do feel like we've got an economy that provides a pretty good support for hitting within that 5% to 7% range. I think when you see us get up towards 7% is when you'll start to see a couple of these headwinds that we've talked about for probably two years now really starting to kind of recover fully and that means recycling. That means some consistency in RIN pricing then you'll see us in the 7% possibly even exceeding 7%. But with just solid waste you're talking about a 5-plus percent number that's probably double the overall economy. It shows you how strong solid waste is.

Yes. That's helpful. I guess the other interesting thing for me is that that 5% to 7% target kind of built a two by two price volume backdrop. And as we look at the 2020 outlook now it's a 2.5% price 1.5% volume which seems inherently more valuable to me. And I just wondered if that 2.5% 1.5% is more accurate in terms of what we should be seeing for WM over that targeted time frame that three-year time frame.

I think the 2.5% is probably a bit more reflective of what you might expect going forward. The 1.5% as we said earlier in your question here reflects the tough comps. So all things being equal in other words the economy not being a big headwind of any kind then I would expect that normally we'd be closer to that 2% number that we've historically given. But this year we have as we said the tough comp with the fires.

There's also a tough comp with the New York City contract. And so the fires in the New York City contract together are about that 50 basis point differential. And so it's important to know that we've not backed off of the 2% long-term volume outlook. It's the 1.5% is reflective of that tough comparison.

Yes. It shouldn't be surprising to you that we're that we want to be a little bit conservative when we issue our guidance. I mean it's probably better to under-promise and over-deliver than the opposite. So I think we've got what we believe is very achievable guidance set for 2020.

And I guess just a key takeaway here is that we're running at 2.5% whereas you guys had a longer-term outlook of 2% on the price which I think is probably pretty notable. Last question for me just trying to understand the SG&A line. I think you have this 10% SG&A margin target. I just wondered if that's a number we hit in 2020 and whether there's more opportunity to continue to move that down just around these technology investments starting to be more than offset by the savings and benefits from those investments.

I think when you look at 2019 Jim's mentioned earlier about those two items that we're not planning for and certainly are not items that we expect to recur. Those two items if we adjust for those we would have delivered SG&A as a percentage of revenue up 10% in the year. And so we remain committed to that target over the long term. And what you see in addition to those two items are the impact of the ADS integration planning work that we're doing we did adjust for those and we'll continue to adjust for those in the year ahead and then my mention of our enterprise resource planning efforts that we started in the fourth quarter. So those two items will elevate the level of reported SG&A above 10%. But when we call those out and really focus on the fundamental investment in the organization from a technology perspective you're absolutely right things like investments in our call center technology where we should be able to serve our customer online rather than having them call into our call center to get information about their accounts or their service will drive a reduction in SG&A over the long term. But right now what we see is the incremental investment of that dollar into technology and our people is going to position us to want to continue to maintain SG&A as a percent of revenue at 10% rather than allow it to tick down because we think that those investments are worthwhile and great incremental value for the long term.

Jim or John big picture question but I want to come back to that 4.5% MSW yield print this quarter the 3.8% for the year which I felt like was if not the biggest one of the biggest stories of 2019. But it feels that there is real post collection pricing momentum. And if we believe that pricing at the curve emanates from the landfill why wouldn't we expect this new call it paradigm of landfill pricing really to set a stage for a prolonged positive pricing outlook on the collection side I would presume that over the long run core collection and core post collection pricing really should equal out?

Well look Tyler, I think one does kind of get the other. But as we've talked about landfill pricing for probably a decade we've never really been able to establish any consistency there. And that's I think you're absolutely right. I think you pinpointed it and that is that it's one of the big stories for 2019 for us that we were able to, as I said in my remarks, get a strong MSW price number that is starting to approximate that cost structure that we've also talked about every quarter for the last two years. I mean we keep talking about how our cost structure is going up by 5% and MSW is going up by 1% and we're finally getting to a point where we're starting to close the gap there. And so that's a big deal for us. And we're starting to do it on a consistent basis. I think our customers understand that things like leachate costs which have been a topic of discussion for two years here that leachate costs are going up and they're going up really on a permanent basis that labor costs continue to go up. So this is a very big story. It's a story that we've ultimately talked about for a long time but never really been able to nail down. And now we're finally able to say we feel like landfill pricing is really here to stay.

Tyler I would add to that. We are equally as focused on the transfer station pricing as well as part of the post collection network. You've heard us talk about pressure on subcontracting costs and whatnot. So when you look at it I in particular, the team are working hard at what we're doing on the transfer side. We talked about residential. I mean if you look at our residential core price and yield it's going up. It's progressing. And we talked about volume; there could be some volume pressure there. But I think it would deliver better margins and better returns when you walk all the way through the network. I think we're comfortable with that.

Well I think one last thing here Tyler. When we talk about it's a little bit of an add-on to what John said there. But when you talk about margin improvement you might say 'Well gosh I mean you're not even covering your cost increase there with your landfill. What are you so excited about?' Look I mean I would tell you that 4.5% is better than 1%. So while we may not be covering that cost increase which is kind of pushing 5% of the landfills it still is going to add to our margins similarly on the resi line of business which is really the one collection line of business that's seen margin degradation over a period of five to 10 years falling, I don't know John, almost in half over a period of 10 years that that line of business will also start to affect overall margins even though we will not get back to where we were 10 years ago for quite some time. So while we're while a lot of this is really just cost recovery, cost recovery it's cost recovery that we weren't doing in the past. So and we've got to get there now. And I think consistently we're starting to show that.

So I hate to maybe nitpick just a touch. But in 2019 you posted collection and disposal yield of 2.8%. Again we talked about accelerating post collection. So why are you guys looking for a deceleration of collection and disposal yield in 2020? Is that just conservatism?

Yes. I mean I think a little bit of that is conservatism. I mean it's we've said all along that we would be 2% price 2% volume. 2% was kind of the baseline. So I would tell you that 2.5% is if you want to think about it the way I just said it on the previous question here, it's kind of almost a new baseline for yield which is and instead of 2% maybe we call it 2.5%. We're not ready to call it two eight yet.

There's also a tough comp with the New York City contract. And so the fires in the New York City contract together are about that 50 basis point differential. And so it's important to know that we've not backed off of the 2% long-term volume outlook. It's the 1.5% is reflective of that tough comparison.

Yes. It shouldn't be surprising to you that we're that we want to be a little bit conservative when we issue our guidance. I mean it's probably better to under-promise and over-deliver than the opposite. So I think we've got what we believe is very achievable guidance set for 2020.

And I guess just a key takeaway here is that we're running at 2.5% whereas you guys had a longer-term outlook of 2% on the price which I think is probably pretty notable. Last question for me just trying to understand the SG&A line. I think you have this 10% SG&A margin target. I just wondered if that's a number we hit in 2020 and whether there's more opportunity to continue to move that down just around these technology investments starting to be more than offset by the savings and benefits from those investments.

I think when you look at 2019 Jim's mentioned earlier about those two items that we're not planning for and certainly are not items that we expect to recur. Those two items if we adjust for those we would have delivered SG&A as a percentage of revenue up 10% in the year. And so we remain committed to that target over the long term. And what you see in addition to those two items are the impact of the ADS integration planning work that we're doing; we did adjust for those and we'll continue to adjust for those in the year ahead and then my mention of our enterprise resource planning efforts that we started in the fourth quarter. So those two items will elevate the level of reported SG&A above 10%. But when we call those out and really focus on the fundamental investment in the organization from a technology perspective you're absolutely right things like investments in our call center technology where we should be able to serve our customer online rather than having them call into our call center to get information about their accounts or their service will drive a reduction in SG&A over the long term. But right now what we see is the incremental investment of that dollar into technology and our people is going to position us to want to continue to maintain SG&A as a percent of revenue at 10% rather than allow it to tick down because we think that those investments are worthwhile and great incremental value for the long term.

Jim or John big picture question but I want to come back to that 4.5% MSW yield print this quarter the 3.8% for the year which I felt like was if not the biggest one of the biggest stories of 2019. But it feels that there is real post collection pricing momentum. And if we believe that pricing at the curve emanates from the landfill why wouldn't we expect this new call it paradigm of landfill pricing really to set a stage for a prolonged positive pricing outlook on the collection side I would presume that over the long run core collection and core post collection pricing really should equal out?

Well look Tyler, I think one does kind of get the other. But as we've talked about landfill pricing for probably a decade we've never really been able to establish any consistency there. And that's I think you're absolutely right. I think you pinpointed it and that is that it's one of the big stories for 2019 for us that we were able to, as I said in my remarks, get a strong MSW price number that is starting to approximate that cost structure that we've also talked about every quarter for the last two years. I mean we keep talking about how our cost structure is going up by 5% and MSW is going up by 1% and we're finally getting to a point where we're starting to close the gap there. And so that's a big deal for us. And we're starting to do it on a consistent basis. I think our customers understand that things like leachate costs which have been a topic of discussion for two years here that leachate costs are going up and they're going up really on a permanent basis that labor costs continue to go up. So this is a very big story. It's a story that we've ultimately talked about for a long time but never really been able to nail down. And now we're finally able to say we feel like landfill pricing is really here to stay.

Tyler I would add to that. We are equally as focused on the transfer station pricing as well as part of the post collection network. You've heard us talk about pressure on subcontracting costs and whatnot. So when you look at it I in particular, the team are working hard at what we're doing on the transfer side. We talked about residential. I mean if you look at our residential core price and yield it's going up. It's progressing. And we talked about volume; there could be some volume pressure there. But I think it would deliver better margins and better returns when you walk all the way through the network. I think we're comfortable with that.

Well, I think one last thing here Tyler. When we talk about it's a little bit of an add-on to what John said there. But when you talk about margin improvement you might say 'Well gosh I mean you're not even covering your cost increase there with your landfill. What are you so excited about?' Look I mean I would tell you that 4.5% is better than 1%. So while we may not be covering that cost increase which is kind of pushing 5% of the landfills it still is going to add to our margins similarly on the resi line of business which is really the one collection line of business that's seen margin degradation over a period of five to 10 years falling, I don't know John, almost in half over a period of 10 years that that line of business will also start to affect overall margins even though we will not get back to where we were 10 years ago for quite some time. So while we're while a lot of this is really just cost recovery, cost recovery it's cost recovery that we weren't doing in the past. So and we've got to get there now. And I think consistently we're starting to show that.

So I hate to maybe nitpick just a touch. But in 2019 you posted collection and disposal yield of 2.8%. Again we talked about accelerating post collection. So why are you guys looking for a deceleration of collection and disposal yield in 2020? Is that just conservatism?

Yes. I mean I think a little bit of that is conservatism. I mean it's we've said all along that we would be 2% price 2% volume. 2% was kind of the baseline. So I would tell you that 2.5% is if you want to think about it the way I just said it on the previous question here, it's kind of almost a new baseline for yield which is and instead of 2% maybe we call it 2.5%. We're not ready to call it two eight yet.

There's also a tough comp with the New York City contract. And so the fires in the New York City contract together are about that 50 basis point differential. And so it's important to know that we've not backed off of the 2% long-term volume outlook. It's the 1.5% is reflective of that tough comparison.

Yes. It shouldn't be surprising to you that we're that we want to be a little bit conservative when we issue our guidance. I mean it's probably better to under-promise and over-deliver than the opposite. So I think we've got what we believe is very achievable guidance set for 2020.

And I guess just a key takeaway here is that we're running at 2.5% whereas you guys had a longer-term outlook of 2% on the price which I think is probably pretty notable. Last question for me just trying to understand the SG&A line. I think you have this 10% SG&A margin target. I just wondered if that's a number we hit in 2020 and whether there's more opportunity to continue to move that down just around these technology investments starting to be more than offset by the savings and benefits from those investments.

I think when you look at 2019 Jim's mentioned earlier about those two items that we're not planning for and certainly are not items that we expect to recur. Those two items if we adjust for those we would have delivered SG&A as a percentage of revenue up 10% in the year. And so we remain committed to that target over the long term. And what you see in addition to those two items are the impact of the ADS integration planning work that we're doing; we did adjust for those and we'll continue to adjust for those in the year ahead and then my mention of our enterprise resource planning efforts that we started in the fourth quarter. So those two items will elevate the level of reported SG&A above 10%. But when we call those out and really focus on the fundamental investment in the organization from a technology perspective you're absolutely right things like investments in our call center technology where we should be able to serve our customer online rather than having them call into our call center to get information about their accounts or their service will drive a reduction in SG&A over the long term. But right now what we see is the incremental investment of that dollar into technology and our people is going to position us to want to continue to maintain SG&A as a percent of revenue at 10% rather than allow it to tick down because we think that those investments are worthwhile and great incremental value for the long term.

Jim or John big picture question but I want to come back to that 4.5% MSW yield print this quarter the 3.8% for the year which I felt like was if not the biggest one of the biggest stories of 2019. But it feels that there is real post collection pricing momentum. And if we believe that pricing at the curve emanates from the landfill why wouldn't we expect this new call it paradigm of landfill pricing really to set a stage for a prolonged positive pricing outlook on the collection side I would presume that over the long run core collection and core post collection pricing really should equal out?

Well look Tyler, I think one does kind of get the other. But as we've talked about landfill pricing for probably a decade we've never really been able to establish any consistency there. And that's I think you're absolutely right. I think you pinpointed it and that is that it's one of the big stories for 2019 for us that we were able to, as I said in my remarks, get a strong MSW price number that is starting to approximate that cost structure that we've also talked about every quarter for the last two years. I mean we keep talking about how our cost structure is going up by 5% and MSW is going up by 1% and we're finally getting to a point where we're starting to close the gap there. And so that's a big deal for us. And we're starting to do it on a consistent basis. I think our customers understand that things like leachate costs which have been a topic of discussion for two years here that leachate costs are going up and they're going up really on a permanent basis that labor costs continue to go up. So this is a very big story. It's a story that we've ultimately talked about for a long time but never really been able to nail down. And now we're finally able to say we feel like landfill pricing is really here to stay.

Tyler I would add to that. We are equally as focused on the transfer station pricing as well as part of the post collection network. You've heard us talk about pressure on subcontracting costs and whatnot. So when you look at it I in particular, the team are working hard at what we're doing on the transfer side. We talked about residential. I mean if you look at our residential core price and yield it's going up. It's progressing. And we talked about volume; there could be some volume pressure there. But I think it would deliver better margins and better returns when you walk all the way through the network. I think we're comfortable with that.

Well, I think one last thing here Tyler. When we talk about it's a little bit of an add-on to what John said there. But when you talk about margin improvement you might say 'Well gosh I mean you're not even covering your cost increase there with your landfill. What are you so excited about?' Look I mean I would tell you that 4.5% is better than 1%. So while we may not be covering that cost increase which is kind of pushing 5% of the landfills it still is going to add to our margins similarly on the resi line of business which is really the one collection line of business that's seen margin degradation over a period of five to 10 years falling, I don't know John, almost in half over a period of 10 years that that line of business will also start to affect overall margins even though we will not get back to where we were 10 years ago for quite some time. So while we're while a lot of this is really just cost recovery, cost recovery it's cost recovery that we weren't doing in the past. So and we've got to get there now. And I think consistently we're starting to show that.

So I hate to maybe nitpick just a touch. But in 2019 you posted collection and disposal yield of 2.8%. Again we talked about accelerating post collection. So why are you guys looking for a deceleration of collection and disposal yield in 2020? Is that just conservatism?

Yes. I mean I think a little bit of that is conservatism. I mean it's we've said all along that we would be 2% price 2% volume. 2% was kind of the baseline. So I would tell you that 2.5% is if you want to think about it the way I just said it on the previous question here, it's kind of almost a new baseline for yield which is and instead of 2% maybe we call it 2.5%. We're not ready to call it two eight yet.

There's also a tough comp with the New York City contract. And so the fires in the New York City contract together are about that 50 basis point differential. And so it's important to know that we've not backed off of the 2% long-term volume outlook. It's the 1.5% is reflective of that tough comparison.

Yes. It shouldn't be surprising to you that we're that we want to be a little bit conservative when we issue our guidance. I mean it's probably better to under-promise and over-deliver than the opposite. So I think we've got what we believe is very achievable guidance set for 2020.