Waste Management Inc (WM) — Q1 2023 Earnings Call Transcript

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

Thanks, Ed, and thank you all for joining us. We're off to a solid start in 2023 with first quarter results, delivering on our expectations and keeping us on track to achieve our full year guidance. First quarter revenue grew 5% with continued strong organic growth in the collection and disposal business of 7%. We're pleased with these results, particularly when you consider the impact of West Coast weather disruptions on our operations. With that said, our first quarter performance was basically on our budget and our strategic priorities of maintaining strong price discipline, permanently reducing our operating and SG&A cost structure through business optimization, technology and automation and leveraging our sustainability platform for growth are right on track. Executing on these priorities will produce the robust short-term and long-term financial performance that we've projected. As you heard at our Sustainability Investor Day at the beginning of the month, we're very enthusiastic about how the growth in our renewable energy and recycling businesses strengthens WM's compelling investment thesis. We expect the investments that we're making over the next several years to provide meaningful operating EBITDA and free cash flow growth with impressive returns. We remain on track to bring online two new renewable natural gas facilities and seven newly automated material recovery facilities by the end of the year. We're also opening one new MRF in 2023 in the Greater Toronto area, which positions us strongly in the largest growth market in Canada. Even as these important parts of our operations grow, our solid waste business will continue to make up the lion's share of our earnings, projected to generate roughly 85% of operating EBITDA in 2026. As a result, our focus on optimizing performance and reducing costs in the solid waste business through technology and automation is critically important and will serve to further separate us from our competition. One excellent example of this is the expansion of our customer self-service capabilities where we've reduced our call center department costs in the first quarter by more than 20% compared to last year while at the same time maintaining or improving our Net Promoter Scores in the commercial and industrial lines of business. So far in 2023, the WM team continues to deliver strong performance. The investments we're making set us up to further differentiate our industry leading asset network and capabilities. When you combine this strategic positioning with the essential nature of our service, our diverse customer base and our recurring revenue streams, it provides confidence in our ability to continue to reach our strong financial projections over the long-term. For the remainder of 2023, our outlook remains consistent with the full year guidance provided at the beginning of the year, including adjusted operating EBITDA growth of 7% at the midpoint and between 40 and 80 basis points of adjusted operating EBITDA margin expansion, driven by our collection and disposal business. In closing, I want to thank the 49,000 people behind WM's success this quarter and every quarter. Without this team, none of this would be possible. And I'll now turn the call over to John to discuss our operational results for the quarter.

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

Thanks, John, and good morning. We're pleased to see our robust revenue growth and disciplined focus on cost control translate into solid operating and free cash flow. First quarter cash flow from operations of $1.04 billion is in line with our plan and a strong result, particularly when you consider higher cash interest and incentive compensation payments. Capital spending in the quarter totaled $660 million, with $504 million related to normal course capital to support our business and $156 million of spending on sustainability growth projects. On the capital front, there are two key takeaways. The first is that we're pleased with the continued progress on our sustainability growth projects relative to plan. The second is that truck deliveries are improving. At this time last year, we received less than 50 trucks. This year, we received about 470. While this is certainly better and shows some easing of the significant supply chain constraints from a year ago, we're still waiting for truck deliveries we planned for 2022. These delays impact our team's ability to deliver on residential collection optimization objectives and targeted improvements in our maintenance cost per driver hour. So, while we're encouraged the worst of the recent uncertainty is behind us, we still need to see a more reliable delivery schedule from manufacturers. Our business generated free cash flow of $395 million in the first quarter and free cash flow before sustainability growth investments of $551 million, which puts us on track to deliver our full year guidance on this measure of between $2.6 billion and $2.7 billion. Even as we invest in high-return sustainability growth projects within our business, we continue to demonstrate our commitment to all of our capital allocation priorities. We returned $639 million to shareholders during the quarter, paying $289 million in dividends and repurchasing $350 million of our stock. We expect dividends to total about $1.1 billion this year and with our outlook for strong earnings growth over the remainder of the year in a healthy balance sheet we expect to continue to repurchase our shares fairly ratably over the remainder of the year. Our leverage ratio at the end of the first quarter was 2 times, which is well within our target ratio of between 2.5 and 3 times. About 18% of our total debt portfolio is at variable rates and our pre-tax weighted average cost of debt for the quarter was about 3.7%. Our balance sheet is strong, and we remain well-positioned to fund growth investments. Turning to SG&A, we're pleased with the progress we're making to drive leverage from a more efficient cost structure. In the first quarter, SG&A costs were essentially flat with the same period in the prior year, and spending as a percentage of revenue improved by 40 basis points to 9.7%. These results demonstrate our success in rationalizing costs and optimizing our sales and customer experience functions. We expect our investments to continue to drive improvement in SG&A costs and put us on a path toward a permanently reduced SG&A cost structure. Our operating EBITDA margin performance for the quarter was generally in line with our expectations. The 40 basis point margin decline year-over-year is due to three things; one, commodity price impacts on our renewable energy and recycling businesses, which created a 50 basis point margin headwind. Two, the dilutive impact of acquisitions completed in late 2022, which had about a 40 basis point impact. And three, cost pressure in our collection and just local business from wage inflation and delayed truck deliveries, which we estimate had about a 20 basis point impact. These margin impacts were offset in part by a 40 basis point improvement in SG&A and a 30 basis point benefit from the timing of alternative fuel tax credit. Our disciplined organic revenue growth and focus on optimization and cost control are expected to drive year-over-year margin expansion for the remainder of the year, particularly in the third and fourth quarters. In closing, the WM team has delivered a solid start to the year, which sets us up for another year of strong financial growth in 2023. I can't thank our hard-working team members enough for all of their contributions to our success. With that, Tawanda, let's open the line for questions.

Good morning. Thank you for taking my question. The EBITDA margins were modest, particularly compared to what analysts had expected. I appreciate the detailed information you shared. You reaffirmed guidance for an 80 basis points improvement in 2023. Do you believe we will see EBITDA margins start to improve in the second quarter or at least stabilize, with a more significant improvement in the third quarter? I would like to know more about the timing of the margin improvement.

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

Great. Thanks for the extra detail. And last question for me. Maybe just how did the value of the recycled commodities in 1Q compare to your expectations? Can you share what you might be expecting for 2Q? And apologies if I missed this, but are you still looking for a $70 a ton commodity basket for 2023? Thanks and I'll turn it over.

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

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

We are excited to see improvements in the supply chain and truck deliveries. As Devina pointed out, we have delivered nearly 500 trucks year-to-date compared to only 50 last year. It typically takes 30 to 45 days to get those vehicles on the road and to retire the older ones, so there is a slight lag. This was factored into our plan for EBITDA and EBITDA margin for this year. Upon reviewing our situation, we realized that since post-COVID, we are behind by over 2,000 vehicles compared to our fleet plan. We expect to receive the full complement of trucks this year, estimating around 1,500 to 1,600. We aim to expedite the deployment of these assets to maximize their benefits. It's important to note that the maintenance and repair pressure is not solely due to the trucks we missed in 2022; it's a continuation of catch-up from 2021 through 2023.

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

So, John can address the cost side and what we're seeing so far. I would tell you that as far as the overall macro economy, we've been looking at it closely because it seems as if every day, somebody comes out with a different projection. Maybe the best indicators for us are things like churn and price rollbacks. Those have been at the historic low end of our ranges and continue to be there. Also looking at some of our volume numbers, especially MSW, MSW was 2.7%. It's around 3% still. So, those are pretty good signs for the overall economy. Now we tend to be kind of at the back end. So, sometimes we don't see the early signs. But everything we're looking at still seems to be okay. It doesn't look like a blowout for sure, but it doesn't look like the bottom is falling out. So, that's encouraging.

I believe I've addressed the maintenance and repair costs and some of the challenges we've encountered. The positive aspect is that we're beginning to make progress. Regarding labor, I mentioned earlier that we were nearing high single to low double digits, but that has eased down to mid-single digits. This is certainly a benefit for the remainder of the year. With subcontractors, we are still experiencing some delays, particularly with third-party transporters. However, as you may have noticed in our post-collection pricing and specifically at our transfer stations, we are continuing to manage that through the revenue quality of the remote gates at the transfer station. Ultimately, when we discuss automation and optimization, it's primarily about permanently reducing our operating expense exposure. As Jim highlighted, this is our main focus for the rest of the year.

Fantastic. Thank you.

Yes, hi, good morning everyone.

Good morning.

Devina, I'm wondering if you can talk about second quarter. So, normal seasonality is your margins are up about 200 basis points second quarter versus first quarter. And you mentioned a number of one-offs in the first quarter. So, I'm wondering, as you're thinking about the cadence, is there a potential for margins to be up stronger sequentially than the typical two points that we've seen in the past.

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

That's great. You have good visibility on achieving your margin run rate as early as the second quarter. Can you provide more details on the post-collection pricing momentum that John mentioned? I would assume a significant portion of that is due to CPI pricing. It's also great to see strong numbers in both transfer stations and landfills.

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

I think it’s important to highlight that our team has come to understand that landfill airspace is a valuable resource, especially on the East Coast where it is expensive and limited. We need to reflect this in our pricing, which is largely influencing what you see in transportation and landfill pricing.

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

On the call center side, we did not refill approximately 580 positions last year and we plan to leave another 300 unfilled this year. I would estimate that we're about 60% complete in that regard. Additionally, some of the positions we've discussed, as John mentioned, involve replacing reloaders with ASOs, which could improve productivity by around 30%. However, we haven't been receiving the trucks necessary for that transition. Our public sector team is also engaged in discussions with customers to ensure they are comfortable with trash being collected in totes instead of leaving everything on the curb. They've made good progress, and we anticipate that we may choose not to refill an additional 2,000 helpful positions, knowing that these roles typically experience about 50% turnover. Once the trucks arrive and we have those customer conversations, we will proceed with the transition. A crucial point John noted is that this change will enhance our safety, as 70% of our injuries occur in the residential line of business, with an estimated 90% of those related to rear-loaders.

Very interesting. Thank you.

Hey good morning.

Good morning.

Hey Jim, John, I was reviewing the Q4 transcript, and I couldn't find it. Could you remind us about the level of unit cost inflation that's included in the 2023 guidance and what your current situation is?

Sure. In terms of unit cost inflation, we expected in 2023 about 4% to 5% unit cost inflation for the year. And when we look at Q1, it was certainly higher than that. But our expectation is that, that moderates. And as John has talked about, in particular, labor and repair and maintenance are expected to benefit from the actions that we saw early signs of as we looked at February, March, but we expect to continue to gain momentum over the remainder of the year.

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

Yes. Look, I didn't see what their numbers were at. But I would tell you this, first of all, I looked back. Historically, we anticipated the question. And historically, Q1 has been the lowest yield for us over a period of probably a decade. It's almost always been the lowest yield number on a quarter-by-quarter basis. But when I look at how we're doing with things like rollback of price and churn, those are, as I said, near the bottom end of our historic ranges and continue to be there. Also looking at some of our volume numbers, especially MSW, MSW was 2.7%. It's around 3% still. So, those are pretty good signs for the overall economy. Now we tend to be kind of at the back end. So, sometimes we don't see the early signs. But everything we're looking at still seems to be okay. It doesn't look like a blowout for sure, but it doesn't look like the bottom is falling out. So, that's encouraging.

Okay, perfect. My final question is about the margin walk, as there is a lot to review. I want to ensure I understand correctly. Commodities and RINs accounted for a 50 basis point headwind, and M&A was about a 40 basis point headwind. You mentioned something about 30 basis points related to a fuel tax credit. I'm unclear if that is a negative or positive impact. Also, regarding higher incentive compensation, I wasn't certain if you were referring to cash flow or EBITDA. Is the holiday addition also around a 50 basis point headwind, perhaps due to one less workday?

Certainly. The alternative fuel tax credit contributed positively by 30 basis points, primarily due to timing. Last year, there was a delay in the government's approval of these tax credits, which meant we could only recognize the benefits starting in the third quarter of 2022. This year, however, we will recognize those benefits gradually each quarter. We received the benefit in Q1 and will see another in Q2, with a reduction in Q3, followed by normalization in Q4. Regarding the 50 basis point dilutive impact from commodity businesses, you are correct. The incentive compensation had an effect on cash flow. When we provided guidance for 2023, we indicated that working capital would pose a challenge this year. Most of this headwind was experienced in the first quarter, where higher incentive compensation payments were made due to our strong performance in 2022 relative to our plans. This impact will lessen and is expected to become advantageous for the rest of the year. On the solid waste side, I mentioned the MLK holiday, which accounted for a 20 basis point margin headwind. It's important to note that this impact is not expected to recur, so while it won’t necessarily provide a benefit, it won’t be a repeating concern for the rest of the year since it was a one-time occurrence.

There wasn't one less workday. We still had to work those days, but we paid everyone time and a half.

Okay, that’s very helpful. Okay, perfect. Super helpful as usual. Thank you so much.

Thanks, Tyler.

Hey WM, how is everybody today?

Good morning Michael.

Hey.

So, John, what is the trend on service intervals, new business formation, temporary roll-off asset utilization?

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

From an asset utilization perspective, Michael, I think it's important that as John mentioned, it takes 35 to 40 days to get those new trucks in service and on the road. That means that we've been holding on to some of our older vehicles longer. And so asset utilization, not necessarily where we like it to be. But that's because we've needed to be intentional about keeping our vehicles and maintaining them so that we meet all of our service needs for our customers.

So, this is just an observation, Michael, but we conducted our business review with all our sectors last week. One of our sectors was actually set to return some rental trucks, which, as you can understand, are quite valuable. We were informed that a few trucks, less than a dozen, would be returned. However, that area returned their trucks, which caused a delay of another 30 to 45 days in some deliveries. So, to Devina's point, there is some caution in the field, and we recognize that it’s a challenge to send those trucks back, whether they are rentals or surplus. The positive aspect is that, as mentioned, we have nearly 500 trucks ready on the ground that are not yet in use. This gives us a clear strategy regarding rentals and surplus assets for the remainder of the year and boosts our confidence in the delivery schedule, allowing us to deploy those trucks effectively.

Okay. And then just to settle the on-temporary losses. I mean, that's sort of a good canary in the coal mine about business activity. What's the temporal loss utilization look like?

I don't know, Michael, we've noticed a significant change there. I want to mention that we don't usually comment on weather, but there were a few areas on the West Coast where operations were halted for a few days due to some unusual weather. Aside from that, I believe the temperature situation has been stable.

Okay. And then, Devina, can you share something? I know it historically don't, but I think it helps put in perspective Tyler's question. Your 62 is a good number. But what's the mix of index versus open market? Because I think there's some waiting issue there that people should appreciate given that 70% of your index is happening now and it's a number from last summer, not the end of the calendar year.

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

To clarify, the impact on the 62 people are looking at sequentially comes from the figures in the first half, which are not just about the immediate CPI. It actually reflects data from last summer, and this is lower than the CPI at the end of the year. This nuance is important for your model since a significant portion of your business resets in the first half. It's not a negative; it's just something that everyone needs to comprehend.

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

Right. Okay. And then on the commodity side, the other pieces of your model are RINs in nat gas and electricity. Overall, you have an assumption all this would improve. I have a suspicion maybe you will end up with two lefts and a right versus two rights and a left to get to the same outcome. But do you feel comfortable about the whole mix, not just recycling that all of those things are going to collectively get to the right place relative to the guide?

I appreciate your thoughts on that, Michael. I was trying to find the right way to express it, and you articulated it better than I could. You’re correct; in any large organization, there will be certain factors that benefit us and others that pose challenges. Currently, RIN pricing is a bit of a challenge since we budgeted $2.30, but it stands at $2. That could create a bit of a hurdle for us. However, we’ve also experienced some advantageous factors. Our SG&A numbers are notably favorable; I don’t think we've ever had an SG&A figure as a percentage of revenue below 10% in the first quarter, considering Q1 typically sees low revenue. We are managing SG&A better than expected. The same goes for MSW volume and a few other metrics. So, there are indeed some aspects that are underperforming against our expectations, with RIN pricing being one of them. On the brighter side, recycle pricing, which we discussed earlier, is aligning perfectly with our expectations. We're happy with that since some had raised concerns about our $70 estimate, which appears to be on track. You’re right that many factors are currently at play here.

Okay. And then last one for me. One of the things I've noticed that you have all been doing, and maybe it was perpetual, first of all, maybe it was just an outcome, is the gap between what you're getting in yield in collection versus the yield in post-collection has been closing. How much more can that close? It's a good thing. Well, how much more can that close?

I think it will continue to close. And I said it a little bit earlier, but there's a real appreciation for the fact that especially landfill airspace is a precious commodity. Particularly when you think about it on the East Coast that space doesn't come cheaply, and there's a finite life to all of those. So, we need to price it that way. And that's, in large part, what you're seeing out of transportation but also largely landfill pricing.

Okay. Thanks for taking the questions. Looking forward to seeing you in New Orleans.

Thanks, Michael.

Hi, good morning. Thanks for taking my question. In your prepared remarks, you mentioned the MRF you opened in Toronto. I am curious about how that positions you considering Ontario's potential producer responsibility legislation. Does this MRF enhance your competitiveness regarding the opportunities that may arise from that legislation?

I believe it does, Ken. It puts us in an excellent position since it is the highest growth province in Canada, and Toronto is the largest city. This means we are really well positioned. Additionally, this MRF will incorporate a new style with a lot of automation. As with all our new MRFs, we expect lower labor costs, around 30% less per unit due to the automation we're implementing. We're very enthusiastic about the MRF coming to Toronto; we consider it an ideal location for a new MRF.

Perfect. No, that makes a ton of sense. And maybe just the EPA did come out with, I guess, a Phase 3 proposal on heavy-duty vehicles, looking to continue to drive to some sort of net-zero target over time. And I'm just wondering how you view that. I know you obviously had the curves here versus some of your peers on investing in CNG and RNG suites. But just given some of the stuff you've seen, not sure if you think that impacts your fleet strategy or maybe the need to accelerate some of the investments in electrification or some other type of propulsion system that gets you to some sort of GHG emission target based on the EPA's proposal here.

Yes, Kevin, we've had extensive discussions about our CNG and RNG strategy, and we're very pleased with its progress and future outlook, especially as we implement our R&D plans. At the same time, we are also exploring other propulsion methods. Electrification is always a consideration, and there are discussions around hydrogen as well. The positive aspect is that we are monitoring all technological advancements in these areas to understand their progression towards commercialization, particularly in our heavy-duty fleet, which presents unique challenges. I believe we are well-positioned regardless of the technology we adopt. Our fleet strategy, demonstrated through our transition from diesel to CNG/RNG, allows us the flexibility to pivot without significantly affecting our business.

I think it's important to note that electrification is not surprising to anyone on this call. The infrastructure is simply not prepared to support it. For instance, when California advised electric vehicle owners not to charge their cars last summer, it highlighted the inadequacy of the current system. The percentage of electric vehicles in California is likely around 5% or even less. This clearly shows that the infrastructure cannot handle the demand for electric vehicles. Therefore, we've decided to take a positive step forward by transitioning to compressed natural gas (CNG). We expect to reach 75% CNG usage by the end of the year, with a goal of ultimately achieving 90%. The cost is a crucial factor for us; I am not willing to pay three times more for an electric vehicle than what I pay for a CNG vehicle. If these issues are resolved, we're all in favor of moving towards electric vehicles. However, we need to see progress, especially regarding infrastructure, and right now, I’m unsure if that progress is being made.

Can I ask just a follow-up on that? Are your RNG or CNG trucks considered essentially net-zero? Because effectively, you're in a unique position in that you also produce RNG as your landfill. But would a state like California look at your RNG fleet differently than, say, a typical owner-operator running a Class A truck just because you're producing on the front end as well when you're creating a circular economy? Or is that still kind of an unknown now in terms of how they might treat that?

I think from a progression standpoint going from diesel to CNG, CNG-RNG, it's certainly going in the right direction. But I don't think that California, if it's a combustion engine, I'm not sure they would define it any other way, at least at this point in time.

It's a valid point because RNG is a renewable fuel. Therefore, using a renewable fuel to power a CNG truck should result in a net-zero impact. However, I don't think they currently view it that way.

Okay. Thanks for the color and best of luck to 2023 year.

Hi team. I just wanted to confirm that all the guidance is intact, and in particular, including the collection and disposal yield, I think you guys have given us approaching 5.5% number. Just wanted to get that confirmation.

So yes, at this point, we're good with each element of the guidance. So, as Jim was saying earlier, specific to the commodity-based businesses, we have some caution around those. But when we look at the yield component, we actually see the revenue results including yield for Q1 being a little ahead of our plan. So, we're certainly confident in that aspect of the guidance that we provided.

Okay, excellent. That's helpful. And then is there sort of a logical approach we can take to this combined recycling and renewable energy line that's now in the revenue build? I mean, I'm just kind of scratching my head a little bit on how to apply some science to the model there.

Sure. What we intend to do there, at one point, we had moved our renewable energy business into the fuel line, and with some of the noise it was creating in the fuel line, we saw value in pulling that out. What we do is try and work ourselves towards providing better clarity about the key drivers of our business. And because renewable energy and recycling both have commodity-based impacts, we thought looking at those on a combined basis made some sense. And if you need additional color on that, Ed and Heather are sure to get you the details that you need.

Okay, helpful. I'll turn it over. Thanks.

Thank you, Sean.

Hi, good morning. Thank you for the question.

Good morning.

I wanted to highlight that you've made significant strides in reducing SG&A and maintaining a focus on cost reduction. Could you elaborate on whether there's been any shift in your approach to acquisitions as you work to balance SG&A reduction with acquiring new businesses? Specifically, have your views on potential deals, integration opportunities, automation levels, or other cost-saving measures changed, and has this influenced your M&A strategy as you adopt a more cost-conscious approach?

Yes, it's a good question because I wouldn't say that our approach has changed. We always prioritize what makes the most sense for our shareholders. However, I believe your point about the additional synergy is important. We are considering this as we evaluate certain companies. This will truly set us apart, as I mentioned in my prepared remarks. We are reducing costs in our customer experience centers by utilizing a self-service model, which is a significant factor. This differentiation puts us ahead of others who lack that technology. Thus, it creates a synergy for us as we pursue acquisitions.

No, that's helpful. And maybe taking that a step further. As you continue to look to do M&A as well as you move forward with cost-cutting investments. Is the opportunity for that maybe near-term dilutive impact from M&A in a given period of time to maybe diminish over time because of this? Or how are you thinking about that opportunity?

I believe it's important to clarify the dilutive impact from the M&A we experienced in the first quarter, which was influenced by two main factors. First, in our solid waste business, we made upfront investments in our facilities, fleet, and workforce, which accounted for the costs observed in the first quarter from these acquisitions. Second, regarding the recycling segment, our Natura business is still in its early stages, and we are also investing there, which resulted in an additional $6 million in spending for the quarter. While we are realizing benefits from SG&A leverage, the focus has been more on investing in operations and ensuring the long-term success of each business. We are making the expected progress to generate incremental value in both the market for the solid waste business we acquired and in enhancing our differentiated service model in recycling, which is a new area for us.

Understood. Very helpful. Thank you so much.

Thanks. With respect to driver retention and overall compensation in that area of your labor force, how do you expect that to trend, and particularly in the macroeconomic headwinds? And how much room for improvement could there be based on the historical ranges of those metrics in prior downturns? Thanks.

So, it's a good question. So, I think if you look kind of pre-pandemic through the pandemic, we went from obviously historic averages to historic lows, right, in terms of driver retention and turnover for obvious reasons. As we exited those numbers, went up past historic averages. And we've been working really earnestly the last two years, not just on the wage front, but from an employee experience to get those numbers down. And I would tell you, we've made 400 to 500 basis points of improvement in a lot of those key frontline roles. And you heard me in my prepared remarks talk about some of the peak wage inflation where it's moderated to now. So, that's clearly going in the right direction. But the biggest benefit really is when you can stabilize the workforce, those frontline folks. And we talked a lot about drivers, it's our biggest population. Your service gets better, your safety gets better and overtime ratios, training hours, and all those things start to go the right way and we started to see signs of that in Q1.

Thanks. When you entertain conversations with smaller players in your M&A outreach, what are you hearing from them about the impact of higher rates and the kind of persistent required tech investments to stay competitive with the market?

I think we aren't hearing much about technology because companies are more focused on keeping drivers on the road. Some of the businesses we've acquired are experiencing double the turnover we have. This highlights the opportunity for us to gain market share, especially since our customer service offering is superior. Retaining drivers significantly enhances customer lifetime value. We've found that turnover is a consistent issue for many of those companies. Additionally, it's crucial for us to introduce technology to the shrinking labor pool. We've discussed this frequently; Generation Z is less inclined to drive trucks like previous generations did. Our approach to capitalize on this trend is by implementing technology that can optimize operations by 5%, 10%, or even 15%. We are developing an optimization tool that determines the best routes, tracks the location of assets, and accounts for driver expertise. A multitude of factors contribute to full optimization, and I am confident that no one else can match our capabilities in this area. Optimizing is not cheap, but once we achieve it, we reduce our reliance on labor. We operate in a labor-intensive industry with a 25% turnover rate among drivers. Leveraging technology is essential for us to navigate this challenge.

Thank you.

Thanks. With respect to driver retention and overall compensation in that area of your labor force, how do you expect that to trend, and particularly in the macroeconomic headwinds? And how much room for improvement could there be based on the historical ranges of those metrics in prior downturns? Thanks.

We believe that PFAS presents more of an opportunity than a risk for us. It is widespread in landfills and the materials that enter them. Currently, the EPA has classified PFAS as a hazardous material, which means they need to realize that hazardous sites are significantly fewer in number than non-hazardous ones. The EPA is still navigating the complexities surrounding PFAS. It's important to mention that we see this as a substantial opportunity for us and for all landfill companies once a definitive approach to handling it is established.

Thanks so much Jim. Congratulations.

Thank you.

Good morning. First question, I guess, is how to think about fuel rolling over in terms of impact to EBITDA and margins over the rest of the year. You have such a high percentage of the fleet on natural gas versus peers. So, maybe it doesn't impact the cost line as much, but perhaps a surcharge line. If you can just give us some guidepost on how to be modeling that or how to be thinking about that, that would be helpful.

Yes, that's a great question, Noah. In terms of impact, looking at 2022, the IRD table provides a good data point, and fuel was a significant contributor. We've already observed in Q1 that our fuel surcharge revenue was less than half compared to Q4 of last year on a sequential basis. This revenue decline should actually benefit our margins. While we didn't notice a substantial margin impact in the first quarter, we do anticipate seeing some margin impact in the remaining year. We're also implementing important steps to improve our overall cost structure, which relies on the fact that 75% of our fleet uses CNG. However, our consumption assessment isn't limited to just the collection line of business; we're also considering heavy equipment at our landfills. Therefore, we're ensuring that our surcharge isn't solely based on diesel but is a blended surcharge. Customers will begin to notice these changes in the second quarter. We are confident that we will continue with the true pass-through model we've had for many years, though it will appear somewhat different in future quarters due to the significant diesel price increases we experienced last year and the structural changes we are making in how we bill our customers.

That's really interesting. And I mean, there's benefits here potentially to the customers as well because historically, I mean, I forget the last few years. But historically, CNG fuel prices have been more stable relatively. So, would that change just be received positively by customers as maybe a way to help reduce volatility to them on the cost side?

We absolutely see that as something that our customers will receive well. And our customers already like the fact that, that CNG truck that's rolling down the street is quieter than the diesel vehicle. We see this as something else that the customers will receive as a positive from WM investing economically and environmentally beneficially in a differentiated fleet to service.

Great. And then just on recycling, just trying to get some better gauges or indicators of demand. Maybe you can talk to your sense of the mills inventory position on recycled fiber. Maybe characterize the flow of impounds and inbound. I'm guessing kind of late 3Q, you probably didn't hear a lot of phones ringing in terms of requests for product. How is it trending now?

Yes, I believe we have gained advantages from our brokerage business as part of the recycling portfolio, particularly in our ability to move the material effectively. We have no issues with transporting the material we receive, and even as we increase volumes, we can still manage the movement of that material. Jim mentioned an interesting point about the new domestic capacity that is becoming available this year. Recently, we have observed some positive changes in fiber pricing over the last few weeks. Overall, the entire basket of goods has shown an upward trend as we transitioned from the fourth quarter to the first quarter and even from the first to the second quarter.

No, it also helps that China's open back up. And while we don't send a lot of stuff straight to China anymore, they do affect worldwide demand. And when China has closed down with their COVID policy, that hurt worldwide demand. Now, that they've chosen to reopen their economy, that is helping and that will help us out as well.

All right. Thank you, Tawanda. I guess just to conclude here you've heard that we're on track for another solid year. We were right on plan for the first quarter. Looking forward to seeing a lot of you next week in New Orleans. Should be enjoyable. So, thanks for joining us this morning, and we'll see you next week.