Waste Management Inc (WM) — Q3 2021 Earnings Call Transcript

Thank you, Erika. Good morning, everyone. And thank you for joining us for our Third Quarter of 2021 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 filed a Form 8-K this morning that includes the earnings press release and is available on our website. 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. 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. John will discuss our results in areas of yield and 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 2020. Net Income, EPS, operating EBITDA and margin, operating expenses, 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 we found on the Company's website for reconciliations to the most comparable GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today, until 5:00 PM Eastern Time on November 9th. Time-sensitive information provided during today's call, which is occurring on 10/26/2021, 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 will turn the call over to Waste Management's President and CEO, Jim Fish.

Thanks, Ed. Thank you all for joining us. Our third quarter performance highlighted the exceptional cash-generation capability of our business model as we generated nearly $1.2 billion of cash from operations. Our solid results put us on track to meet the higher full-year financial outlook we provided last quarter, even as we face some of the highest inflation that we've seen in years, along with labor and supply chain constraints. Virtually, no segment of the economy, including government and the private sector, has been unaffected by these historically acute inflationary and supply chain challenges. Disbursement inflation accelerated through the third quarter and during the quarter, we saw roughly $60 million of labor inflation at about $100 million of inflation in other operating cost categories. Overall, our underlying labor inflation for the third quarter was 8.7%. So that's the tough news. The good news is that the business continues to perform well as demonstrated by the fact that we still expect to finish the year within our previously adjusted operating EBITDA range, adjusted operating EBITDA, and free cash flow guidance ranges. And we will be above our prior revenue range due to strong price execution and strengthening volumes. John, Devina, and I will discuss what we're doing about these labor and inflationary pressures in the short-term and medium-term. Not surprisingly, our disciplined price programs are the primary lever to combat cost inflation. Our pricing programs delivered core price of 4.6% and collection and disposal yield of 3.5% in the third quarter. Standout performance continues to be the residential line of business with a yield of 5%, while MSW yield improved to 3.5%. But keep in mind the price escalations on about 40% of our revenue are tied to an index, often based on a look back over the prior year. So, there's a timing lag in adjusting index pricing when costs step up as quickly as they have. And it's important to understand that a portion of the remaining 60% of our business won't get the full 7% to 10% price increases we believe we need to cover rising costs until their next price increase cycle. A customer who had an increase of 4% in May won't get the full cost recovery price increase until next May. That said, we're seeing a favorable price environment across our open-market businesses, evidenced by our low level of rollbacks in over a decade. We're very focused on directly addressing the labor challenges. John will discuss the quarterly impact and how we're working to address this immediately. Strategically, we're looking at this acute challenge as an opportunity to expedite the automation of certain jobs. We've said previously that we view the automation of certain high turnover positions as both a competitive advantage and a derisking mechanism in today's labor market where certain jobs simply don't attract the interest they previously did. The most recent examples of that are the customer setup role which we just finished fully automating and the 35-plus percent reduction in labor we've seen, where we've upgraded our single-stream recycling plants. Given the success of these rebuilds and the labor inflation challenges of late, we have accelerated the retooling of the remaining single-stream plants and expect to address 90% of single-stream volume by the 2023-2024 timeframe. In the quarter, we saw some of the positive impacts of those new single-stream plans in our outstanding performance in our recycling business. Earnings contribution and margins for recycling were at their highest level ever, driven by strong demand for recyclable material and great operating performance from the new state-of-the-art facilities. We were equally pleased with results in our renewable energy business in the quarter where robust growth continued, driven by more rents sales at higher prices. With our long-standing expertise, continued growth in sustainability solutions and unrivaled asset network, Waste Management is uniquely situated to support our current and prospective customers in their evolving sustainability needs. Our customers are increasingly seeking circular solutions for their materials, which is causing growing demand for recycled content. Of note, our focus on unlocking more plastic from the waste stream drove a 25% increase in plastics we recycled since 2019. Recycling and renewable energy are two of our key growth areas, highlighted in our annual sustainability report published earlier this month. The report outlines the progress Waste Management has made against our sustainability goals, and details investments we've made to advance our sustainability journey. In particular, this year's report focuses on the people behind the progress Waste Management has made in the past year and how they are doing their parts to take care of our customers, neighbors, and the environment and communities across North America. The bottom line for the quarter is this: we generated higher-than-expected volume and revenue growth in the third quarter, which positions us well for 2022. At the same time, we faced unexpectedly acute and fast-moving challenges from inflation, supply chain, and labor shortage headwinds. And we managed our way through it well and still expect to achieve results within our 2021 guidance ranges. And this challenge presents an opportunity for us to move more decisively in those strategic areas of automation, sustainability, and workforce planning to further differentiate ourselves in this industry. In conclusion, I'd like to thank the nearly 50,000 people who continue to drive another quarter of double-digit growth in revenue, operating EBITDA, and free cash flow. I'll now turn the call over to John to discuss our operational results for the quarter.

Thanks, Jim. And good morning. Our team continues to execute very well despite a challenging operating environment producing more than 7% organic revenue growth in the collection and disposal business in the third quarter. This growth combined with continued integration of Advanced Disposal drove operating EBITDA more than 14% higher. As Jim mentioned, we are seeing pressure on labor and other cost categories, and we are addressing these impacts through our pricing programs, controllable cost management, efficiency improvements, and workforce planning. Adjusted operating expenses as a percentage of revenue increased by 180 basis points to 62.2% in the third quarter, as we experienced pressure from inflationary costs, supply chain constraints, and stronger-than-expected volume growth. In particular, costs related to the hiring and training of new employees impacted labor costs in the third quarter. We also saw overtime hours increase as the team adjusted to meet the higher-than-expected collection volumes. We anticipated a good portion of this labor pressure that is showing up in our costs, as we made proactive market wage adjustments earlier in the year to get in front of labor shortages and meet growing demand. At the same time, we are working to automate a number of roles where we see longer-term challenges to attract and retain employees. In the residential line of business, we continue to work through the last 40% of our route, including those from Advanced Disposal that are not fully automated, while continuing to be very selective in the business we are willing to take on, as evidenced by our yield and volume results in the third quarter end of the last few years. While we are now incurring the cost associated with these investments, we're only in the early stages of seeing the benefits. Our labor market supply chain constraints accelerated in Q3, coupled with robust volume growth in the third quarter, have also added pressure in operations, repair, and maintenance costs, as we hire additional technicians and incur some overtime hours to address the strong volume growth we continue to see in the collection lines of business. Similarly, we've had to temporarily place some of our higher-cost trucks back in service to address volume demands. In addition, our third-party subcontractors at our transfer stations are facing similar pressures and are passing those increased costs onto us. Overall, efficiency in the collection business in the third quarter improved as we adjusted for increased training hours. The fundamentals of our business remain strong and we are committed to recovering our cost increases through pricing and by taking the most expensive truck off the road and reducing costs during the most expensive hours of the day. Now I want to focus on several of the positives in the quarter. Turning to our strong revenue results, third-quarter collection and disposal volume grew by 3.8%, which outpaced our expectations. We continue to see strong volume driven by economic reopening with commercial volume up 4.6% and special waste volume up by 16.6%. And we see runway for continued solid performance in the fourth quarter. Customer metrics were also strong in the quarter. Service increases outpaced service decreases by more than twofold for the second consecutive quarter and churn was 8.7%. Year-to-date net new business for small and medium business customers is up more than 10%. Finally, our integration of Advanced Disposal continues to go smoothly. We've combined around 70% of the acquired operations into our billing and operational systems and we remain on track to migrate virtually all the ADS customers by the end of the year. We have achieved nearly $26 million in annual run rate synergies during the third quarter, bringing the year-to-date total to $60 million. Combined with the $15 million of annual run rate synergies realized in the fourth quarter of 2020, we're on track to reach $100 million by the end of the year. Our teams are working tirelessly to provide safe and reliable service to our customers and communities, and I want to thank them all for their efforts. And with that, I'll turn the call over to Devina to discuss our financial results in further detail.

Thanks, John, and good morning, everyone. As we have seen all year, robust volume growth, strong recycling commodity prices, and an increased collection in disposal core price continued to deliver top-line growth ahead of expectations in the third quarter. As a result, we are once again updating our revenue outlook for the year. Total Company revenue growth is now expected to be between 17% and 17.5%, with yield and volume in our collection and disposal business of about 6.5%. This guidance also includes an expectation for continued strength in recycled commodity prices and RIN values. We're confirming our most recent 2021 adjusted operating EBITDA guidance, between $5 billion and $5.1 billion, which is an increase from the prior year of about 17% at the midpoint, and almost 5% higher than our initial outlook for the year. Third-quarter SG&A was 9.7% of revenue, a 40-basis point improvement over 2020. Included in our results is about $16 million of increased digital investments, as we advanced technology that will benefit customer engagement and lower our cost to serve over the long term. We remain focused on managing our controllable spending and ensuring that we allocate each dollar to initiatives that will enhance our business. Third Quarter net cash provided by operating activities was $1.18 billion, an increase of 15%. Cash from operations growth continues to be driven by our robust increase in operating EBITDA, including the contributions from the ADS acquisition and lower interest costs. While there was a modest unfavorable working capital comparison in the third quarter, due in large part to the timing of cash from P&G credit and our deferral of payroll taxes in 2020. Overall, improvements in working capital demonstrate the benefit of tools we're putting in place to enhance our systems and processes. In the third quarter, capital spending was $464 million, bringing capital expenditures in the first 9 months of the year to $1.13 billion. Our 2021 pace of capital spending has continued to be slower than we planned due to supply chain constraints and construction projects taking longer than planned. As we discussed last quarter, we are proactively pulling forward capital investment, particularly in recycling, where we know the returns will be strong. Investments in recycling technology and equipment are expected to be about $200 million for the year. While we continue to target full-year capital spending at the low end of our $1.78 to $1.88 billion guidance range, we could see 2021 coming in below targeted levels with some of our spending pushed into 2022 primarily due to supply chain constraints. We generated $773 million of free cash flow in the third quarter. And through September, our business generated free cash flow of $2.29 billion, putting us well on our way to our full-year targeted free cash flow of $2.5 billion to $2.6 billion. We've returned more than $1.7 billion to our shareholders through the first nine months, paying $730 million in dividends and repurchasing $1 billion of our stock. We continue to expect to repurchase up to our full authorization of $1.35 billion in 2021. Our leverage ratio at the end of the quarter was 2.71 times, as the strength of our business performance in the successful integration of the acquired ADS business drove the achievement of our targeted leverage ratio ahead of plan. As we enter the final stretch of 2021, our teams are focused on accelerating our disciplined pricing programs, managing our controllable costs, positioning Waste Management as an employer of choice, and capturing growing volumes. We know our strategies set this up for a solid finish to 2021. With that, we'd be happy to address the team's questions.

Good morning, guys.

Good morning, Tyler.

Hey Jim. Thanks for all the color on inflation. I know you guys don't give a ton looking ahead on these Q3 calls, but it just sounds like the setup for pricing looks very favorable next year. I mean, you've got clearly this inflationary environment. You have strong CPI resets and you alluded to an open market that feels very rational. So just big picture. Why wouldn't pricing in '22 accelerate pretty meaningfully? And do you have confidence that you can price in excess of unit cost inflation next year?

Yes, I believe you're correct, Tyler. The main takeaway from today is that we have experienced cost inflation, which has been widely discussed in the media. Furthermore, it has occurred more rapidly and to a greater extent than we anticipated. The price adjustments, which are our primary method of offsetting this, do not align perfectly with the timing of the cost increases, resulting in a lag. We have mentioned that 40% of our business is tied to an index, and there is often a look back involved. For the title rep segment, about 40% of that business revenue comes in January, while around 30% arrives in July. This means that 70% of our price increases related to the index business take place in the first half of 2022. The remaining 30% will be realized in October, with some minor adjustments throughout the rest of the year. Additionally, when discussing the open market, I referred to a customer who received a 4% price increase back in May. We need to be cautious and avoid informing customers that we are raising their prices by another 6% in October due to inflation pressures. Instead, we plan to wait until their annual cycle next May to implement the necessary price increases that will cover costs and enhance margins.

Yes. Okay. That is extremely helpful. Real quickly, Devina. So, it sounds like there's a lot going on in the EBITDA margins this quarter year-to-year. I don't know if you can distill it down, but can you just help us bridge out that 140 basis points down in EBITDA margin, specifically, and some of the key buckets there?

The two primary buckets to look at are really the inflation impacts that we've discussed and then recycling brokerage. So, we would say that about 60% of the impact was from inflation and about 40% was from recycling brokerage. To put a little more color around the inflationary impacts that Jim mentioned earlier, that total was a $160 million during the quarter. We estimate that our normal inflationary impacts would have been about $60 million of that. So that was a $100 million in excess of what we consider normal inflationary impact. And then, you might recall that we had projected that we were going to have about $60 million over and above our normal run rate in the back half of the year. So, we think that our costs in Q3 were about $60-$70 million above what we would have projected, and that you can see is a pretty meaningful impact to the overall margin of the business. I think it's important to look at our cost structure and see that 35% of our operating costs are labor-driven. And then when you consider subcontractor costs, which is effectively indirect labor, that's another 15%. 50% of our cost structure is labor-driven and we've seen that as a big driver.

And Tyler, I would only add that, with the additional volume I commented on in my prepared remarks, part of what we've done is we're spending a little bit more overtime in the short term to be able to go out of service and take advantage of the strong volumes. I mentioned in my comments that outpaced our expectations, which we view as a good thing over the long term. And certainly, we have a clear line of sight to what those costs are as Devina spoke to.

Great. I'll hop back in the queue. Thanks.

Thanks, Tyler.

Good morning. Thank you. Just a follow-up on just operating leverage. I guess listening to your comments, is it fair to say that the second half next year is when you'll see greater operating leverage? Just given the timing of these pricing resets? And related to the operating leverage, how much of your cost increase is incremental hiring because of labor availability issues impacting that, versus how much is just restarting your existing labor cost base up that you referenced with wage adjustments? I would also put subcontractor cost into that existing labor reset, I guess.

Yes, Hamzah, good morning. I would tell you that when I look at the labor increase hold hours and this is in aggregate, about a quarter of it is related to some additional training and hiring we're doing, some of that has to do with turnover pressures that I think we're seeing, and just about everybody in the transportation industry is seeing. I think the good news is, over the last four or five months, we've actually started to make good progress in terms of our retention rates. The labor resets that we talked to last quarter, which are clearly showing up in this quarter as well, are having an impact there. The other three quarters of it, if you will, were up numbers is related to some of the overtime we're incurring. Part of that, as I mentioned, is we don't view that over the long term as a bad thing because we're seeing volume increase as we are outpacing our expectations. I think as Jim mentioned previously to Tyler's question, we have a clear line of sight on what we need to do through pricing and efficiency gains, etc., and automation to be able to overcome that. I do think 70% of that index business resetting in the first half of the year is clearly something that we're focused on and as Jim mentioned, our pricing strategy more broadly is not going to change, our expectations will have to change to keep pace with the cost increases we've outlined.

Got it. Very helpful. My follow-up question is about investment in automation and technology. Jim, you mentioned the acceleration of automation and referred to Murphs and some customer startup functions. At a high level, what stage are you at in terms of automation? What remains to be done? Is it just focused on recycling? Additionally, from a technology standpoint, what do you currently have and what is still to come? Thank you.

I think we might be in the early stages of our journey with automation, likening it to being in the second inning of a baseball game. There is a lot under the automation umbrella. We have discussed the digitalization of customer service, which is a part of it, but the automation I’m referring to goes beyond just technology in the conventional sense. It involves things like optical sorters in our plants. We currently have around 45 single-stream plants, and we have fully automated four of these plants so far. This automation is expected to reduce labor by about 35%, translating to roughly a million dollars in labor savings per plant each month. We still have about 40 plants to automate. While we are focusing on the larger plants first, even the smaller plants will contribute to these savings. Additionally, it’s not limited to the roles related to recycling; there are many positions with high turnover that are suitable for automation, and we plan to explore those moving forward. Overall, the impact of automation extends beyond just customer setup and recycling. I also want to address a point about operational expenses, particularly in light of the COVID situation. At its peak, we had nearly 900 employees out, mostly due to COVID, and we chose to pay them. During a peak week, this left us with significant overtime costs as we covered their routes, amounting to around $2 million to $3 million over a two-week period. Thankfully, that number has decreased significantly to around 200, allowing us to manage our workforce more effectively. This was a short-term cost, and unless another variant emerges, we don't expect to face the same situation again.

Still, I just want to clarify one thing, the savings from the recycling plant is a million dollars per plant for a quarter, not for both?

Sorry. Sorry. I knew it.

Got it. Thank you so much.

Good morning, everyone. Thanks for taking my question. So, press assistance for Devina, looking at merging enhancement in and you've had a great track record in historic years of achieving margin, margin improvement year-to-year, but now, as you re-priced and a lot of your re-pricing is to pass through costs, you are able to protect EBITDA dollars, but it can be somewhat margin dilutive given the pass-through nature. So, when we look to next year, is there any cautionary you're cautioning us to keep in mind when we look at historical margin expansion versus next year margin expansion, given that a lot of your revenue is cost pass-through revenue?

Yes. I would say that, what's really important is to go back to one of Jim's earlier comments about the fact that, the acute nature of the cost increase that we experienced during the third quarter. And the fact that our index revenue is more significantly weighted towards the first half of the year indicates that we had a mismatch in terms of when a lot of those price increases are pushed through. And when we experienced the more acute cost increases. We are not in any way indicating that this is anything other than that lag and kind of a one-time or short term, I should say, impact in terms of margin degradation, our outlook remains strong in terms of the business's ability to work, both through pricing and operating efficiencies as the automation that we've discussed in order to improve the long-term margin of the business. I think that 2022 can have some noise in it with regard to some of these timing differences continuing, particularly as you think about the year-on-year impact of the volume expansion that we've seen in 2021. But our outlook remains solid with respect to expectations over the long term being one of margin expansion even with a higher cost structure.

Okay. That's great color. Appreciate that. And then my follow-up is just with regard to wages and the percentage of your workforce that has been re-priced if you want to call it that, is there a larger part or a meaningful part of your workforce that you perhaps are coming up on wage discussions or renewal that will likely see an outsized price increase that has not yet been built into your numbers, or are you pretty much done from that overall wage repricing framework?

Most of the wage adjustments we discussed in Q2 and implemented in Q3 have primarily affected drivers, technicians, front-line employees, and our recycling staff. I estimate that around 65% to 70% of our workforce falls into this category. It's important to note that while we haven't necessarily raised rates for every single one of those employees, we have addressed the compensation for that group. As for the remaining 30% to 35%, we are closely monitoring them as part of our ongoing efforts. We regularly assess wages, at least once a year, to ensure all employees are compensated fairly in line with market conditions.

Okay, that makes a lot of sense. I appreciate the time as always.

Thank you, Walter.

Good morning. 2018 solved a lot of the inflation for the first time, the market's first-time seeing garbage deal with inflation. How would you compare the pace of that versus the pace of what you're experiencing right now? And then let's remind everybody, you covered all of that inflation with pricing, eventually then too.

I don't think they're very close. This situation is much more severe than what we've encountered before. I doubt anyone at our company today, aside from perhaps a few individuals in their '70s, has experienced this level of rapid inflation. The example I mentioned about a customer receiving a 4% price increase in May illustrates this; we didn't even see these effects in May, as they emerged suddenly by the end of July and really accelerated. There wasn't much discussion about it at the time, but it's now being addressed all the way up to the White House and by the Fed's Chair. I would say that this is more severe than we've seen previously. You're correct, Michael, we did manage this through pricing, and we believe that pricing is our main tool to cope with this situation, and we're handling it well. However, I want to emphasize that there are certain high turnover roles that are not directly related to this inflationary phase. We really need to consider automating some of these high turnover jobs and simultaneously utilize digital customer service to optimize efficiency in our organization. John and I have had extensive discussions about this, and we anticipate that fully automating these routes could lead to an efficiency improvement of around 10% to 15%. While we won't be able to automate truck driver positions during my career, there are still significant opportunities for efficiency growth in that area.

Okay. Fair enough. So clear message is, and you've said this in pieces, but I want to say it out loud, you've expected to cover all this inflation. You just need time and time isn't years, it's months.

I think that's correct. We should concentrate on the 40%. That figure is driven by indexing, and as I mentioned, half or 70% of that occurred in the first half of the year. There is a look-back period, so the adjustments made in January for some large contracts will not fully reflect the impact of inflation due to a 12-month look-back, meaning we won't capture the complete effect of inflation from the last three months until the adjustments in January 2023. The adjustments made in July will largely account for the acute inflationary impacts.

Okay, fair enough. Devina, on the free cash flow, what are your assumptions to maintain the guidance of 2.5 to 2.6 on cash flow from ops and capital spending?

From a capital spending perspective, we would love to spend every bit of the full-year guidance that we put forth of $1.78 to $1.88 billion. But as I mentioned, all year we've seen things move just a little more slowly than we would've liked, and we have taken some proactive steps in order to pull some capital forward. That said, right now, we think we could finish the year somewhere in the range of $1.7 to $1.8 billion. We'd love for it to be a higher number than that, particularly as we've made investments in renewable energy and recycling specifically. In terms of the other puts and takes, I think it's important to recall that we expected an increase in our cash taxes on a year-over-year basis. We've seen that through the nine months, but you'll have another leg of that in Q4. And then we've seen significant working capital contributions in the first nine months of the year. We think we'll give some of that back in Q4, just based on some timing impacts of some payments that we have. But all in all, really good performance in cash flow for the year, I would say it is the one that has certainly exceeded the expectations in every single aspect of contribution. All in all, total free cash flow at about the midpoint of $255 is tremendous growth. On a year-over-year basis and meaningfully ahead of the $1965 that we normalized when you look at 2020 for the impact of the proceeds from divestitures from the ADS transactions. So that shows the level of growth on a year-over-year basis and free cash flow.

Okay. But to sum your comments, if you end up spending on the lower end of Capex, there's an upward bias to the midpoint of the range on free cash flow.

The one thing I would caution there is on the cash flow from ops we do have the taxes and working capital impacts that I mentioned. That's the only caveat that I would have there, but yes.

Okay. John, I recently saw Tim Hawkins, Jason Kraft, and a few others from different companies at a NWEA meeting. They indicated that you had passed your peak open positions and were no longer dealing with that issue. Is that still an accurate statement? Has the pressure peaked and begun to add a bit?

I would tell you within Waste Management, as I mentioned in my prepared comments, probably over the last four or five months, we've really started to show some progress in terms of being able to net add, if you will, month-in and month-out at some of those key positions, specifically, the driver ranks. There's still a lot of competition out there, there's still a lot of pressure. As Jim mentioned, you can't turn on the TV without hearing about some form of pressure and transportation, whether it's marine, whether it's rail, or whether it's truck transportation. But as I mentioned, the good news is I think the efforts we made to make some of those wage adjustments coupled with our efforts around retention and hiring are certainly yielding positive results here for the last four or five months.

So, you're off the peak open positions is the clear message?

Correct.

We have approximately 10% of our drivers earning over $100,000 annually, and the figure for those making above $90,000 is even higher. Additionally, we offer excellent benefits; we introduced educational benefits a few months ago and continued to pay them during COVID and for those in quarantine. We are truly committed to supporting our team, which we believe helps reduce turnover. According to my reading last week, there are around 82,000 open trucking positions across the U.S., and concurrently, we are experiencing an increase in volume. We are working to address this situation. While it is a good problem to have, we recognize that we are moving past the peak but feel confident that we are well-positioned. We believe our benefits play a significant role in our competitive pay structure, allowing us to stand out.

And then last one for me, for John, I think I picked up in your remarks that you all are seeing net new business growth not just where you opened leverage. It's net new business growth and there's momentum, that momentum should continue. So that's good news, but I guess there's two pieces to that. How does that impact the thoughts about capital spending inflation being able to meet that net new business growth?

First, I want to emphasize two points I shared in our prepared remarks, Michael, which you are likely familiar with. The first is that the net service increases compared to decreases is strong from Q2 to Q3. Secondly, I mentioned the small and medium business sector, which traditionally relies on collection activities, and I would say it is somewhat separate from the very large accounts. We’re seeing positive momentum in that area. The 10% figure reflects this, but regarding capital, there will be some incremental spending, specifically on containers. As we've discussed previously, there’s a step function between filling up one raft and moving to the next, but we don’t view that as unusual capital spending.

Terrific. Thank you very much.

Good morning, everybody, thanks for taking my question here. If I can ask us on your repricing strategy for next year, just given how acute inflation as you've mentioned, Jim. Just wondering how you look to maybe limit or you've got a lag between when you see pricing versus maybe this year that inflation might be more persistent than we all had hoped a few months ago. But like, are you looking at contract terms that might allow you to reprice in the event that inflation continues to persist at elevated levels? Or are you pricing for maybe what do you think inflation could go versus maybe what costs you've seen increase in the back half of this? Just being interested in seeing how you think about that repricing strategy to kind of limit that lag, as you look out into 2022.

Yeah, Kevin, the lag really just hits us in the first part where we're this kind of three-month period. Once we catch up with that, and once we catch up with these adjustments on the 40% that's index-based then, unless inflation runs up from here, which we don't anticipate, I'm not sure I've seen anybody that anticipates that, then we feel like we're in a really good position with pricing to cover these cost increases plus add margin. Now if inflation goes to 15% then I will retract that statement, but I don't think anybody expects that, so right now, if you look at core price, for example, we're pretty happy with the core price numbers that we were showing. Core price was 6.1% for the quarter in commercial. That's a big core price number if you look at the landfill line of business which has gotten a lot of questions over the last couple of years. Core price in landfill was 4.6% as 2 consecutive quarters over 4% of core price. And really that's probably the best metric for looking at price increases, is core price versus yield. So, I feel really comfortable with the existing CPI and core inflation in the system that the pricing mechanisms that we have in place will cover that and also provide us some opportunity to improve margins as we go into 2022. Keep in mind that 12-month look back, a big piece of the adjustment that's coming in January won't include all of the inflation that's going to take a year to capture that.

That's great color. Yes, let's all hope we're not heading for 15% inflation there. Maybe I can ask a non-inflation question. Recently put out this P-fast strategic roadmap, I guess as it looks to evaluate what the studies and I guess things they look to go over the next few years. Just wondering, as you look at the roadmap that you put out there, is there anything that you would comment on? Does it align with what you thought that EPA would do? Or think the EPA should do as they evaluate the P-fast strategy?

Yeah. Kevin that was just something off the press here in the last week or two with some milestone dates that the EPA published on some things they want to get covered, but I think that our answer is still the same to that. It could present a little bit of short-term cost impact to us, but we still believe over the long term, the post-collection assets we have are going to benefit from that certainly over the long term.

All right. I'll leave it there, thank you for taking my questions.

Thank you.

Hi, Jim. Thanks for taking my questions. I'm just curious if you've seen any instances where this labor shortage is causing a down take in service quality. Have you guys tracked that anything concerning there? I just wonder if that ultimately impacts Waste Management's ability to continue this great pricing trend we've been seeing?

So, Sean, we do see some areas of concern. We monitor this closely every day, and our team is attentive to it. We have experienced some significant turnover challenges, but as we noted in Michael's reply, we believe we've moved past the worst of it and are making progress. Regarding your second question about whether this situation affects our pricing strategies, we don't believe it does. Despite the labor challenges, particularly in our residential services, our pricing approach and corporate yield results for this quarter and the previous ones have not been adversely affected, nor has any other segment of our business.

Well, I think it's on the churns. The churn is probably the best metric for us to gauge that. And churn came in at 8.7% for the quarter. We look at the same quarter prior year, and it was 8.8%. We're not seeing an uptick in churn, I think we're doing everything we can at the operating level, there's a lot of pressure on the operation, when you have about 500 drivers out due to COVID during the peak or when we've got all of these hiring pressures, you expect that there's going to be some pockets, as John mentioned. And we're doing everything we can to make sure all the way up to my level. I get notes from customers saying, hey, my recycling was missed today, and so I pour that out to the right person to make sure that we pick them. But there have been some pressures, but we think that we're moving in the right direction and it certainly helps when you see that number of 900 employees out for COVID come down to 200. That was a pressure that was hard to compensate for.

Okay. That's helpful. And what about safety? I mean, do we need to be kind of incrementally concerned about safety and the costs associated with safety issues around this labor dynamic? What's the thought there, Jim?

Well, I should probably let John answer that but the answer would be we never compromise on safety. Safety is at the very top of our list. And so, we are extremely focused on being a safe organization. John, anything to add there?

Well, I would say that technology and automation are definitely assisting us in this area. We are currently updating all the onboard equipment on our collection and supervisory vehicles to better monitor behavioral issues. We have integrated some artificial intelligence which is about 70% implemented across our entire collection fleet. This technology will aid in monitoring aspects like following distance and cell phone usage. While we have experienced some challenges with safety results during the integration of Advanced Disposal, our core Waste Management business continues to perform well, and we are making significant progress in incorporating ADS. The integration of the ADS business has also contributed to a doubling of our training hours, as we ensure that new hires receive comprehensive training. We anticipate that these training hours will decrease as we hire fewer drivers and technicians.

Okay. Very interesting stuff. Thanks for the help, guys.

Thanks for taking the question, and frankly, I know I can do as a reminder not to use my cellphone when I'm off the road, so appreciate that guys. I guess the linkage between potential Capex shortfall in operations is something I'd be interested to learn a bit about. Obviously, the commercial vehicle industry's experiencing production constraints, and that's impacting customer delivery. Just wondering how is this impacting the cost structure? I think you mentioned having utilized some older vehicles, but maybe you can talk through a little bit about how that might be translated into elevated costs this year.

Sure, now. I think the way that we think about that, John mentioned, having to take some of the older vehicles off of the sidelines, so to speak, and pull those into service. We saw that most significantly in the industrial line of business and roll-off, because that's where we were able to flex most significantly in 2020. While we do see it on the operating expense side, our long-term focus continues to be on optimizing our fleet strategies so that we focus on reducing the total cost of ownership of each vehicle. We have seen some pressure in terms of per unit cost on the fleet overall. Some of that general inflationary cost pressures, but some of that is that we're driving towards automation to the points they've made earlier, particularly in the residential line of business. So, while we have a more expensive unit on the street, we definitely see the benefits of that in terms of lower operating expense both from labor and efficiency. So overall in the current quarter, that's a component of the cost pressure that we saw. But I would say that that was certainly secondary to the wage pressures that we experienced overall, and we expect that to abate as we get truck deliveries. It's an interesting point that through nine months, we'd only gotten 70% of the trucks that we expected to get in 2021 to date. So, we think that when we get those trucks delivered, you'll start to see some of those impacts reduced as well.

That's helpful. I guess, on the flip side of that, there is what I presume are industry-wide labor and others shortages to do construction work at landfills for expansion. Presumably that's going to be a source of upward pricing pressure at the landfill. You had 3.5% yield this quarter, but I assume you got a pretty robust pricing outlook at the landfill. And this may be a contributing factor.

Yes, I think Jim did a good job of categorizing some of that too. I think there's a few places, steel costs, container costs, or landfill liner, those are all things that our supply chain team and the respective operating teams are keeping a close eye on. And we may make a decision to a fixed can versus buy-one while steel's up 200% or whatever the number is. But that's not the bulk of it. I think Devina spoke to the majority of which is really a fleet spend with some delays there coupled against strong volume. So that's why you talked about some of this cost pressure being somewhat acute, not having confidence whether it's on a collection or the post-collection side including the transfer of subcontractor side that we're going to be able to recover that.

One thing I would caution against is directly correlating the price increase we experienced on third-party volume at the landfill with our potential cost increases there. Just because we reported a 3.6% yield, or 3.5% yield on municipal solid waste, does not mean that our cost increase at the landfills is the same. It's important to remember that much of the volume at a landfill comes from our own operations, which is priced based on market dynamics. We have discussed the overall cost increase, which encompasses the rising costs at the landfills, and it's not safe to assume that a 3.5% increase on municipal solid waste equates to landfill prices or costs rising by the same percentage.

Appreciate that. Thanks, Jim and John. Devina, maybe just one quick one. Any one-time or pull-forward of spending programs that you're currently doing this year that could turn into a margin tailwind next year as you lap, I know that customer service digitalization has been investment focused, but anything you would call out that sort of a margin tailwind next year, that's controllable?

The only one that we've mentioned over the course this year that's higher and therefore creating some margin compression in 2021, is our incentive compensation. That being said, I think everyone at Waste Management would love to see us knock it out of the park next year such that that's not a giveback in 2022, but it's the one that I would call out. There's not anything else other than inflationary lag that we've already discussed.

Perfect thanks so much.

Quit texting and driving, Noah.

Thank you. Good morning. Tagging onto that last question, I believe in the past you've said about 15% of your labor unrelated benefits component of the cost stack is overtime. And you noted it was elevated this quarter. Can you give us an idea of how elevated it was relative to that long run average? And then, should we expect that to normalize into next year as COVID settles out and hopefully you get in front of some of these labor issues?

No David, I think overtime was up about 6% for the quarter. and yes, I do think that as we get some of these folks on board, that we've talked about from our staffing efforts, you're going to start to see, as I mentioned in prepared remarks, take the most expensive outlaw off the street and right now, because of some of the staffing challenges, but also because we've got volume in the collection lines of business particularly commercial and industrial that really outpaced our expectations. We view that as a good problem to have long-term and the short-term, obviously we're spending a little bit some premium dollars to get that volume collected.

So, one quick clarification because it's a great point, David, and this 6% increase is actually on a sequential basis when you look at that on a year-over-year basis, it is meaningfully more pronounced. Their year-over-year is about 30% increase in overtime hours that you saw in our costs in the current year.

Right. It was down significantly last year, so I guess it would've been up anyway, right?

That's right.

Makes sense. Thanks very much for that.

Okay. Thank you.

Thanks so much. I know it's late, I will just ask one. Just continuing the conversation about inflationary increases. I'm just wondering from an M&A perspective, are your sellers’ expectations also increasing? Are they either expecting higher multiples? Or are they talking about adjustments to adjusted EBITDA because it'll be higher cost? Thanks.

I would say that we have heard sellers are experiencing similar pressures in the workplace, which some are referring to as the great resignation. Many are expressing that they have reached their limit and are deciding to sell. However, regarding their expectations, I cannot control them; what I can manage is what I pay. I would prefer to grow organically rather than pay multiples of 13 or 14 times. We will continue to be disciplined in this regard.

Okay. That's great to hear. Thanks so much.

Yes, hi. Good morning. Jim, in your prepared remarks, you mentioned some of the ten percentage points of price increase are needed to cover the higher costs, can you talk about open market price increases that you folks are putting through in October and into year-end? Are you seeing that 10% improvement at the yield line for your open market business based on price increases you're putting through now on what's up for renewal?

Now that 7% to 10% is more of a core price number. That's the price increase we are implementing. To achieve the yield, you have to consider rollbacks and a mix component in the yield calculation. Therefore, you won't see a 7% to 10% yield. However, I mentioned that there has been 8.7% labor inflation for the quarter. To address this 8.7% labor inflation, along with the non-labor inflation discussed by Devina and John, we believe that a price increase of 7% to 10% is necessary. That's what that figure represents.

Okay. And I believe it was two quarters ago, maybe you mentioned that you're satisfied with the way the industry has priced rationally so far in this recovery, has that continued, and now that we're seeing this acute period of inflation?

Did I say that? I usually don't comment on the industry because I can't control it. However, I am pleased with how things have worked out, and we do a good job of assessing not only our inflation, which has been much more rapid than we expected, but also how to enhance our margins. When considering any metric, the residential sector stands out as a significant success. With a residential yield of 5%, it wasn't long ago that we were discussing yields in the 1% range. We are optimistic about our lines of business regarding our pricing, and that is really the only aspect I can speak to regarding what Waste Management is doing.

Okay. And then regarding labor costs, it's clear that labor availability will be low for the duration of this economic cycle. What gives you confidence that we've reached peak inflation in training costs, considering that labor availability could become a growing concern if we revisit this topic a year from now?

Well, I think Jerry, we've obviously got in front of the wage adjustments. We started that a couple of quarters ago, really in Q2, and I think that's certainly helped. The other benefits we have in place have certainly helped. And I think we're tracking the job openings obviously versus volume. And the good news is the volume is still strong. That does put some pressure on the folks that we need to recruit. But as I mentioned, for the last four or five months, we're making headway in terms of what we have versus what we need, even relative to that volume.

And I don't think we can overstate it, I've talked about it a number of times, but a lot of conversation of pricing today has been the primary lever. But I don't think we can overstate the importance of using automation to take some of the labor intensity out of this business. It's a very labor-intensive business. We have positions that have very high turnover that does not imply that we're going to come out with a big reduction, that's not what I'm saying. I'm saying we can automate some of these roles and then use the attrition to our benefit.

I appreciate the discussions. Thanks.

Take care.

Hey guys, thanks for squeezing me in. I'll keep it short. Just for free cash flow conversion, Devina, when we think about next year, can you just walk through the puts and takes, obviously, CapEx this year is coming in low-end for obvious reasons. There might be some catch-up next year so maybe CapEx of sales higher-than-normal. But maybe you could walk through, we think about next year 2022 the working capital taxes, anything you'd like to highlight, as we're thinking about 2022.

Yeah. That's great question, Michael, and we're certainly already looking at how then to do it, a 2022 outlook. The strong conversion in 2021, we step back from that and say if we're targeting a conversion of every EBITDA dollar check free cash flow at 50%, we think that that's the outcome that's representative of a long-term trend for our business. We've had success reducing our interest and tax costs, tax as you mentioned, could be a question mark for the year ahead. Too early for us to say one way or the other although we are optimistic based on some of the conversations that are happening currently. The progress that we've made on working capital management has been really strong. That's one where I would tell you it's too early for us to declare victory. We're implementing new systems and processes and those are showing some value. But it's certainly difficult to use that at least above that 50% target. In terms of managing Capex, that really is the one that we're focused on. Because for us, a capital dollar really should be looked at no differently than an M&A dollar. And if we can get a better return on invested capital from accelerating capital in our recycling business or renewable energy facilities, we're going to do that, and so while we're going to look for opportunities to accelerate capital, we're going to do so in the same prudent way that we always do from a capital allocation perspective. And look at long-term maintenance capital versus what we will consider more of a growth-oriented or investment-oriented capital decision. So that's the one place that there could be an evolution in our discussion in 2022, but no specific outlook that we can provide at this point, we'll give you more color next quarter.

That makes sense. And since you mentioned 2022, when I look at the midpoint of your 2021 guide, implies a margin of 28.3%, around there. That's kind of the fourth straight year of being in that margin range. Now, granted one of those years was in a pandemic, so that's impressive and now we're contending with inflation. So, I know this has been asked a couple of different ways, but do we think that the margin, the typical margin expansion we see in this business, 50 bps or so. Is that more of like a 2023 story as we're kind of in the odd period of coming out of COVID and dealing with some of these inflationary pressures?

What's really interesting in that same three-year period that you mentioned is the impact of recycling on our margin. And I think if you stripped out a way and really consider the inflationary cost impact and the COVID impacts that we've already discussed. You are seeing strong execution on the front line of delivering that 50 basis points of margin expansion. That's why we really wanted to add the color on commodity price impact in the press release, so hopefully, you can take a look at that table. But I do think that, when we look at the collection efficiency at all of these training impacts, we've been really satisfied with the continued front-line execution of the team in delivering margin expansion though it is covered up. So, we have positive expectations for 2022 at this point though there is going to be some continued noise from the recycling part of the business.

Great. Thank you.

Thanks Michael.

Thank you.

Well, just to conclude, thank you to all of our 50,000 employees for the great quarter. This has been a challenging year and a half, particularly for those who have been providing essential service on the frontline since day one. So, thank you to them. Thank you to all of you for joining us this morning. We look forward to talking to you throughout the quarter and early next year. Thank you.