Q4 2020 Waste Management Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to waste management fourth quarter and full year 'twenty 'twenty earnings release Conference call. At this time, all participants are in a listen only mode.
So to speak with you and milestone will be a question and answer session to ask a question. During this session and you only get past star one on your telephone if you wish to remove yourself from the queue. You can pass the turnkey EBITDA acquiring further assistance. Please press star zero and thank you I would now like to hand, the conference over to your host Mr. Ed.
Sir the floor is yours.
Thank you Laura.
Everyone and thank you for joining us for our fourth quarter of 2020 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 Davita ranked and executive Vice President and Chief Financial Officer, you'll hear prepared comments from each of them today Jim.
And will come from a high level financial and provide a strategic update John will cover an operating overview and Dominion will cover the details on financial and including our 2021 outlook.
Before we get started please note that we have filed a form 8-K and this morning and that includes the earnings press release and is available on our website at Www Dot Wm Dot com and the form 8-K, and the press release and our schedule from 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 our filings and the FCC under our most recent form 10-K and subsequent form 10 Qs.
John will discuss our results and the areas of yield and volume, which unless otherwise noted almost separately references to internal revenue growth or IRG from yield or volume.
During the call, Jim John and Amy and I will discuss operating EBITDA, which is income from operations before depreciation and amortization.
And any comparisons unless otherwise stated will be with the fourth quarter of 2019.
Net income EPS, and operating EBITDA and margin and SG&A expenses.
Have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations, including costs incurred in the connection with our fourth quarter acquisition of advanced this fall and services or avs.
These adjusted measures and additional free cash flow and non-GAAP measures. Please refer to and earnings press release and tables, which can be found on the company's website at www Dot Wm dot com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections.
Additionally, reconciliations from our prior six quarters from adjusted operating EBITDA are included in the tables to the earnings press releases for those respective quarters and it can also be found at our website at www Dot Wm Dot com.
This call is being recorded and will be available 24 hours a day beginning approximately one P. M. Eastern time today until five P. M. Eastern time on work force.
To hear a replay of the call over the Internet access waste management's website at Www Dot Wm Dot Com do you hear a telephonic replay of the call dial 855, eight and 592 056 and and the reservation code one day and 65816 times.
And sensitive information provided during today's call, which is occurring on February 18th 2020 may no longer be accurate at the time of a replay any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of waste management is prohibited now I'll turn the call over to waste management's president and CEO Jim fish.
Thanks, Ed and thank you all for joining us and I hope, everyone is staying safe and well.
We're extremely pleased with our fourth quarter and our full year 2020 results in many ways, our fourth quarter was a continuation of our strong third quarter performance.
Once again, despite the impacts from the pandemic our team delivered strong and consistent operating EBITDA and the fourth quarter and exceeded the fourth quarter of 2019.
Have you set aside the $38 million of operating and EBITDA contribution from Etfs, and the $60 million fuel tax credit benefit and the fourth quarter 2019 versus 2020, our legacy W. And operating EBITDA grew 4% versus Q4 of 2019.
This was our seventh consecutive quarter to generate operating EBITDA of more than $1 billion.
Showcasing the strength and consistency of our business.
And the fourth quarter, we kept our eye on the ball and working together to provide reliable high quality service to our customers even as we welcomed a substantial number of new customers and team members. Following the acquisition of advanced disposal.
As with the third quarter, our fourth quarter operating EBITDA margin was impressively strong at 28, 1% when you consider debt and included 50 basis points and dilution from Avs.
For the full year 2020 matched our highest annual operating EBITDA margin of 28, 4% and.
And excluding NDS, we set a new record with 2020 operating EBITDA margin of more than 28, 5%.
So in a year, where many companies suffered significant financial impacts from the pandemic and resulting economic crisis and waste management and the resilience of our people and our business model delivered full year 'twenty and 'twenty results within one 5% of our record high 2019 operating EBITDA.
As we look to 2021 in addition to the strong continuous improvement measures, we're taking and our collection and disposal business.
<unk> is in a perfect position to leverage our focus on ESG and our accelerated investments and technology to benefit all of our constituents employees customers shareholders communities and the environment.
W made the decision in March to accelerate technology spending and we're more confident than ever that our investments and customer service digitalization. Our CSD are the right approach to propel us forward and the post Covid world.
And we've made considerable progress towards transforming our business model by seamlessly connecting the front and customer experience to our backend processes.
And our online sales channel is growing at a triple digit rates and most importantly, we're receiving positive feedback from our customers and.
And 2021, the value creation of CST will step up as we further differentiate our service to our customers automated automate manual processes and drive further efficiencies and reliability and our operations.
On the ESG front.
And there'll be some has emerged as a true leader and sustainability.
And we're doing so in a manner that will benefit both shareholders and the environment.
Possibly like no other year. This year's Wm Phoenix open pointed to our ability to demonstrate our expertise and leverage our brand recognition for sustainability.
This was highlighted during our sustainability form panel discussion with two other ESG focused Ceos, Satya nadella of Microsoft and Doug Mcmillon of Walmart.
Following our discussion and I received a note from them, saying thanks for your leadership Jim.
Is that was flattering personally to me, but it was also an important statement about where wm stands reputation Lee with large companies like Walmart with regard to sustainability, and where we can help them and our other customers to achieve their sustainability goals.
And as corporations build roadmaps to address their own climate impacts Wm is well positioned to assistance from an array of service offerings, including recycling and other beneficial uses such as composting and renewable energy generation.
Looking at the potential impact on our financials and so far and 2021 commodities are on a strong upward trajectory and many experts believe this to be the start of a long term trend.
And as North America's largest recycler and one of the largest producers of renewable natural gas from landfill gas.
<unk> should benefit disproportionately from that long term trend.
We're able to close the loop by using that renewable gas to power, our natural gas fleet redefine the processing business with our Nextgen recycling technology enhancements and our fee based pricing strategy.
And make new investments and innovative solutions for low value commodities and expand our portfolio of renewable natural gas plants, all of which position us perfectly to benefit our shareholders over the next three to five years.
In addition to the E and ESG, we're taking the apps, our social responsibility very seriously too.
Whether it's our long established focus on inclusion and diversity, our commitment to our employees through enhanced benefits and guaranteed hours during COVID-19.
And our efforts to help the underserved and unemployed.
Through our work with organizations like ups fire and Concordance Academy, we believe and these causes and we're very confident and the long term value add for our share.
It's rewarding to see that our focus on ESG is a strategic value creator for our shareholders as well as being the right thing to do is getting recognition.
At the beginning of February we were named to Fortune magazine's world's most admired companies list for the third year in a row, claiming the top spot in our industry category.
During the fourth quarter, we were named to Cdp's prestigious a list for tackling climate change.
The global environmental nonprofit recognized waste management for the fifth consecutive year for our actions to cut emissions mitigate climate risks and help develop the low carbon economy.
We were also named to the Dow Jones sustainability indices for North America and the World.
The third year in a row, we earned the title of sector leader for commercial services and supplies and our view is that our strategic approach to ESG will complement our investments and technology and our core business process improvements as the key ingredients of our future success.
Last year, we laid the foundation for lowering our operating cost model and for offering greater choice to how our customers interact with us.
And we completed the sizable acquisition of Etfs and all of this positions us well for growth and 2021 and the year ahead, we expect to deliver organic revenue growth of four to four 5%.
As we continue to execute on our disciplined pricing programs and expect volume growth to improve in 2021 as the impact from the pandemic lessens.
From an operating cost perspective, we've learned how to operate our business with a lower cost structure and we remain.
We expect to retain that lower cost structure in 2021 and beyond.
As a result, we anticipate overall operating EBITDA growth between 10, and 13, 5% and 2021.
We expect this substantial growth as we realize the value of synergies from continuing to integrate.
And improve the profitability of its business all while we increase our investment and CST the.
And the benefits from these technology investments and the full integration of <unk> will provide runway for further margin expansion and the future.
In closing, we performed exceptionally well and 2020, despite the difficulties presented with COVID-19, and we're poised for another strong year in 2021 for that I'm eternally grateful to our teammates who have made it happened this year in the face of difficult circumstances, I will now turn the call over to John to discuss our operational results for the.
Quarter.
Thanks, Jim and good morning, everyone.
And I am pleased with our strong finish to 2020 to performance of the legacy waste management business and our progress and integrating the avs operations and as Jim said, our quarterly and full year results really underscore the strength and resiliency of our business model.
Improving volumes healthy pricing and better recycling performance produced organic revenue growth for the first time since the pandemic began.
And as expected legacy waste management collection, and disposal volumes improved sequentially and the fourth quarter from a decline of five 5% and the third quarter to a decline of two 7% and the force.
Fourth quarter MSW volume grew one 2% and C&D volume, excluding hurricane cleanup grew one 8% both are strong indicators of continued economic recovery.
While the rate of volume recovery did moderate during the quarter, we did not see a backslide when COVID-19 cases increased and the fall and fact as we look at volumes in January we're encouraged to see improvement from the lull in late November and December.
Collection and disposal yield was two 3% and the fourth quarter and core price was three 2%.
And adjusted for the impact of lower volume core price would have been three 8% and.
And the collection business, we continue to make progress improving the residential line of business, our residential yield improved 60 basis points to three 7% and the fourth quarter compared to the same period and 2019 and was up again sequentially from three 5% and the third quarter.
Residential volumes declined one 4% as we shed business that does not meet our return requirements overall, our actions to improve the residential line of business in 2020 resulted in $40 million of operating EBITDA benefit and we expect this to carry forward into 2021.
And in the post collection business fourth quarter landfill core price was three 3% and transfer station core price was three 1% demonstrating our continued pricing discipline and these key lines of business.
Moving to costs operating costs were 61, 5% of revenue and the fourth quarter compared to 62% and the fourth quarter of 2019.
And there was some noise in the fourth quarter results, Let me walk you through the difference.
And the quarter as expected the <unk> acquisition and increased operating expense as a percentage of revenue by 40 basis points.
Additionally, the timing of government approvals for fuel tax credits, which benefited the fourth quarter of 2019 with two years' worth of credits, resulting in a 150 basis point headwind to operating expense as a percentage of revenue and the fourth quarter of 2020.
Aside from these impacts operating cost as a percentage of revenue and improved 60 basis points demonstrating that we are laser focused on cost control and continue to benefit from a lower cost structure.
As an example, commercial yards and industrial hauls declined between five and 6% during the fourth quarter and overtime decrease and the range of 15% to 18% and.
And we see additional opportunities. We also have plenty of opportunity to improve operating costs as a percentage of revenue in the <unk> business as we further integrate operations and work to exceed our planned synergies.
And then we will cover our 2021 financial guidance in more detail, but I want to spend a minute on some key components of growth as we look at the year ahead, we are extremely confident and any aspects of our outlook that we can control and we based our guidance on a stabilizing economy moderate volume growth and disciplined pricing, we expect organic revenue growth.
From yield and volume and the collection and disposal business of between four and four 5% and overall revenue growth between 10, seven and five 5% and 11.
5% during 2021.
We hit the ground running on the <unk> integration October 30th and it's progressing very well, we expect to achieve between 50 and $60 million and synergies during 2021 combined with the $10 million to $15 million of annualized synergies already achieved and the fourth quarter. Our run rate synergies exiting 2021 is expected to be between 60.
And $75 million.
We are extremely confident in achieving these synergies and that will be able to capture the remaining synergies and the first half of 2020 to about one third of the 2021 synergies will come from route optimization, which will begin early in the second quarter, we estimate that our one time cost to achieve these synergies will be $50 million and 2021 and as we.
Mentioned, we plan and adjust the majority of these costs from our results.
As Jim discussed our recycling and renewable energy businesses are central to our strategy and we're anticipating strong growth from these businesses and the year ahead, we expect continued improvement and recycling from our fee per service model improved operating cost structure, and numerous and stable demand for recycled materials, which together provide a tailwind.
Between 40, and $50 million to 2021 operating EBITDA and we also expect an incremental $10 million of year over year contribution from our renewable energy business from the sale of Rins as pricing for those credits has increased over the last several months.
Devine and we'll talk more about our plans to invest in these key businesses and 2021.
In closing I want to thank the entire waste management team, including our new team members from <unk> for their focus and what continues to be difficult and distracting times. The team has done an exceptional job managing our operations and I know this will continue and the year ahead I'll now turn the call over to Devine and to discuss our 2020 financial results and 2021 financial.
Outlook further detail.
Thanks, John and good morning.
And our 2020 results demonstrate strong execution from our.
Mine team across North America, moving our customers throughout the pandemic and doing so and an increasingly cost effective way.
The same focus execution and cost discipline and extended to our team members and sales and back office functions, which delivered strong SG&A results for the year.
Excluding $25 million of SG&A for the Avs business SG&A improved by $56 million and 2020 to 10, 2% of revenue and 10 basis point improvement over 2019.
We achieved these results while accelerating our technology investment and despite the revenue decline from the pandemic I'm proud of our team for this cost discipline and a difficult economic environment.
Fourth quarter capital spending was $394 million and that included $29 million of capital to support.
Yes, and about $30 million of capital debt, we intentionally pulled forward given the strong recovery and our operations during the third and fourth quarters.
2020 capital spending was 1 billion and $632 million.
Jim showed tremendous discipline throughout 2020, as we focused on reducing capital spending and targeted manner, given the volume declines from the pandemic.
Waste management generated free cash flow of 2 billion and $656 million and 2020.
Given the significant impact of the ABS transaction on net result, let me provide detail on some of the moving pieces.
After tax proceeds from the divestitures of Avs and waste management businesses to GSL or $691 million.
These proceeds were partially offset by after tax transaction and advisory costs to support the acquisition of $117 million.
Normalizing for these two items 2020 free cash flow was $2 billion ADT and $9.
This results and illustrates the resilient nature of our business and the strength of capital discipline as we nearly achieved our original 2020 free cash flow guidance to one 5 billion.
Despite the impacts of COVID-19.
Given this strong result at the end of 'twenty and 'twenty, we were positioned to forego relief provided by the cares Act and we elected to pay approximately $120 million of payroll taxes that we had planned to the fire.
And we repaid debt amount in 2021 and 2022 as anticipated.
<unk> thousand 20 free cash flow, excluding the Ats and tax I mentioned would have been about $2 $2 billion per the year.
Which is better than we expected at the end of the third quarter.
And the fourth quarter, we used our free cash flow to pay $231 million and dividend.
Full year, we returned 133 billion to shareholders comprised of $927 million and dividend and $402 million and share repurchases.
In November we issued two and $5 billion and that's been our notes and an extremely attractive pre tax weighted average cost of less than one and 5%.
This allowed us to repay short term borrowings used to fund the <unk> acquisition that closed.
2021 cash interest savings are expected to be more than $90 million.
Fourth quarter total debt to EBITDA of 319 times and forecasted leverage ratios are both well within the financial covenants of our revolving credit facility.
We're committed to returning to our long term targeted range of two and a half to three times total debt to EBITDA during 2021.
Our balance sheet and liquidity remains strong and we are well positioned to continue our practices at sound investment and strong shareholder returns.
Moving to our 2021 outlet.
And as John mentioned, we anticipate $10 75 to 11, 5% revenue growth and year ahead with solid organic growth and the collection and disposal business of between four and four and 5%.
<unk> underpins, our 2021 operating EBITDA guidance of $4, 75, and $4 $9 million.
We expect this strong earnings growth to drive free cash flow of between 2.25 and $2 three $5 billion.
Capital expenditures are expected to be between $1, seven eight and $1 88 billion and 2021.
Excluding about $90 million of capital plan to support the ADF integration. This expectation is in line with our long term capital spend as a percentage of revenue target of nine five to 10 and 5%, even while we step up our investments and DSD.
As Jim mentioned, we also see potential incremental investment opportunities and our recycling and renewable energy businesses.
And so of which eight and our sustainability efforts and generate strong returns.
And we've now seen improved returns and our state of the art Mirth and we are taking plans to deploy the latest technology and additional marks and our network and moving those forward.
We're planning to invest and more renewable energy plants at our landfills.
This investment extends our ability to close the loop between our renewable energy plan and our CMG and fleet and does so with very strong economic returns for the company.
We remain committed to our capital allocation plan that maximizes long term value and total shareholder return.
As announced in December we are pleased to be increasing our planned quarterly dividend for the 18th consecutive year.
We expect our dividend payments to be about $975 million and 2021.
Given our focus on the <unk> integration, we expect tuck in acquisitions to be on the lower end of our typical range of $100 million to $200 million.
With more than $1 billion remaining from our free cash flow guidance, we plan to allocate that to a combination of debt repayment share repurchases and the high returns and sustainability focus and capital investment opportunities I described earlier.
In closing I want to thank the waste management team for their dedication and adaptability and overcome the unique challenges of 2020.
We are stronger than we were a year ago, and we're looking forward to a better 2021.
With that let's open the line for questions.
Thank you ma'am and it.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one and your telephone keypad again that style and the number one and may telephones. Thank.
Thank you I would like to withdraw your question Greg.
<unk>.
Your first question will come from the line of hands and.
Missouri from Jefferies. Your line is now live go ahead. Please.
Hey, good morning. Thank you. My first question is just on on the volume side. What are you guys seeing on commercial service increases.
Good day, how that's trending and then in the four to four and 5% organic growth do you are you baking in any vaccine impact on volume and and how should we think about that.
Yes, good morning Hamzah.
First as far as service increases go.
Looked at the fourth quarter as being really good news because it's the first quarter and while that we've seen net.
Net service increases.
Negative of course, and Q2 and negative in Q3, and so we turned positive in Q4, and that's very good news as it relates to particularly as it relates to small business and.
And then as we think about volume overall.
I think I think what we most macro economists are saying that that's the economy recovers as the vaccine rolls out and so.
So volume is is the one that is the hardest for us to predict normally it's fairly predictable for us, but it's hardest to predict this go round because we don't know how quickly the vaccine rolls out, but we are starting to see some encouraging signs from states that we've talked about previously that were lagging states like Illinois.
Michigan, and Pennsylvania are starting to show some signs of recovery.
There are some states like California, and New York and then also provinces like.
And I would say, Ontario, and Quebec that are still way behind but and then of course the states that have been that opened first like Texas like Arizona.
Tennessee, Florida, those states have been doing actually reasonably well. So our expectation is that those those states that are starting to reopen and even the states that haven't started we'll will start to perk up here and we think that we will be back to some.
Some sense of normalcy on the volume front in the back half of 2021.
Got it that's very helpful and just any any.
Any comments or thoughts around.
You know the new EPA had and any changes you see regulation wise that could impact your business from sort of the biogen and their administration, whether it be fast around leach it whether it's you know renewable tax credits increasing.
Historically, I think you've been able to pass through environmental regulation cost as a fee, but but but just any thoughts around that and and is is the increased investment and and mirth and.
Landfill gas is that linked to what you see coming out of the EPA and all or are you would've done this anyway.
So I'll take the last one first and not really related to what we're seeing coming out of the EPA first of all it's very early and this new administration and so those investments are really related to the fact that we believe.
From an ESG standpoint that they are the right thing to do but we also believe that they provide great shareholder return and so.
And this is not something that.
Came to us and the last three months I mean, we've been we've been investing and these renewable plants.
And doing it as diligently over the last probably four years three to four years and.
And then of course the recycling business is also related but we do think that there is a nice uptrend, starting and it will continue and we believe that it's not your normal ebb and flow in terms of commodity prices and it's why I said in my script I think we're disproportionately affected by this and a good way. So your first question really relates to.
And what our expectations are coming out of the new administration and in an odd sort of way hamzah.
And we feel like more.
And I guess greater regulation is actually a good thing for us because we hold ourselves to a higher standard than the baseline regulations, whether it's from EPA or whether it's from state and the EPS, we hold ourselves to a higher standard and so therefore greater regulation.
Actually ends up being a differentiator for us.
And while we don't know exactly what will come out of EPA in the form of <unk>.
Regulation around things like <unk> or coal combustion residuals things like that we do look at this as being an opportunity so.
So we're we're not displeased with what the future holds for us from that standpoint.
Got it just a clarification question and I'll turn it over.
Guiding EPS or is that sort of not part of.
Guidance anymore, just curious if theres, a change and in guidance or maybe we missed it. Thank.
Thank you and we did guide the EPS and I don't think we did last year, either Davina no and.
The real thing there hamzah that we're focused on is purchase price allocation impact to depreciation and our.
And are difficult to predict and while we have a really strong you and the purchase price allocation with our 12 31, and that's something that can get adjusted throughout the next several months and so the depreciation impacts there or something that will get better clarity on over the course of the year, but that's one of the things that create.
And just noise and EPS and and one of the reasons, we elected not to guide on that time.
Got it makes sense. Thank you so much.
Thank you.
Thank you Sir your next question comes from the line of Kyle White from Deutsche Bank. Your line is now like go ahead. Please.
Hey, good morning, Thanks for taking the question I hope, everyone is doing well and that everyones bandwidth as they had been that severe weather that's occurring.
I wanted to talk about and just kind of see how the integration is going anything and particularly better or worse than you expected about the assets now that you own them.
Hey, Kyle no I think I think I would tell you and 90 plus days in.
I think we're right on track I think <unk> been no real surprises and the things that we've encountered have all and things frankly that we've contemplated we did have the benefit of a longer a longer timeframe getting ready for it but I would tell you that I think we're exactly where we should be and back probably a little bit of head ahead. As you heard in my script. The one area that will take till Q2 to get.
Go and in terms of synergies is on the routing side and it has as much to do with data and system migration as it is anything else and in addition, there is some technology improvements that we're making right now and the Aes fleet to be able to take advantage of all the processes that we have in place to drive to drive efficiency, but I would tell you I'm very very pleased with where we're at so far.
Got it and I know, it's still ongoing and are very sporadic situation, but do you have a sense of the impact that this extreme weather is causing to your volumes or maybe increase the cost of the business.
I would tell you certainly in the Houston area right now it's been a rough couple of days and this is not nearly a part of the country that deals with this kind of stuff very well as evidenced by what's happening here, but I think outside of Houston, and we don't have a real feel for what it's going to and how significant of SMB going forward outside of outside of really Texas I wish I had a sense cash.
The damage to my house, because I've said, it a little bit of damage it.
Great to know when power and water are coming back.
Thank you.
Alright, well I hope everyone's safe and I hope it's over with quickly. Thank you I'll turn it over.
Thank you.
Thank you and your next question will come from the line of Tyler Brown from Raymond James Your line is now like go ahead. Please.
Hey, good morning, everyone.
Good morning, Tyler.
Devine and so thank you for all the guidance. It's very helpful. So as I look at the guidance and I think on my math you are looking for something like 10 to 20 basis points of margin expansion in 'twenty, one and if my math is right. My feeling is there's quite a bit moving around and there can you just talk about the puts and takes on margins from a year over year basis.
And maybe thinking about core expansion, maybe how much recycling is going to help and and maybe how dilutive M&A might be.
Certainly so and.
And you are absolutely right. There are puts and takes that we still see good strong margin expansion on that path towards 30% debt I know that we consistently talk about and.
Net organic revenue and EBITDA growth of our core solid waste business, improving 30% to 50 basis points and the year ahead.
That is going to be partially offset by some known cost headwinds and then also a very intentional increased technology spend level, the increase and technology spending specifically has about a 30 basis point impact on the margin measure and about $50 million impact on EBITDA.
And.
In terms of the other puts and takes I would say recycling from a margin perspective is and actually one other things that contributed to the margin either expansion or detraction and thats because for US we have the recycling brokerage business, which tends to offset the margin expansion that we see and the traditional.
Our business so as we see the operations and curve on the <unk> side, we tend to see a little bit of dilution from growth and our mark our brokerage business, which is very good return on invested capital business for us It dilutes margin.
On the renewable energy side, there will be from margin expansion and that was strong and the fourth quarter and something that we are basically including and our 2021 guidance based on how we finished the fourth quarter of 2020.
And so potentially some upside there.
We see rents prices continue to escalate from where we ended.
Fourth quarter.
And then with regard to the Aes acquisition and I want to pause on that one per amendment.
Fourth quarter EBITDA margin was 18, 5% for the Avs business.
And thats below their run rate of 24, and 5% on a W. Webb measurement basis, and as a reminder, and.
And is EBITDA margin included some adjustments for share based compensation and accretion that waste management doesn't take and it's an EBITDA measure and so on an apples to apples basis since.
And as margin was 24.5% and we have strong confidence that we will get them up to about 28% and 2021, and then continue the March to Wm level from.
And that point on okay extremely helpful. Thank you.
Real quickly as well from modeling perspective. So I think you mentioned you paid the $120 million and cares back I'm. Just unclear is that just the half that was due for 'twenty, one or does that repaid the burden for both 'twenty, one and 'twenty two.
That repays, the burden for 'twenty and 'twenty, one and 2022, so the entire 120 million that we had been debt firing over the second and third quarters, which we paid in Q4, Okay. Awesome. Thank you and then John I know, we've talked about resi margins quite a bit and the past.
In 2020 did <unk> margins improve as you refocus there it sounds like they did and then secondly, how long do you think it takes to get that business back to either call. It a more historical margin level or maybe a level that you would be more.
Happy with.
Well, what I would tell you its tower and my prepared remarks, we talked about $40 million of benefit being generated in that line of business.
In 2020.
I'd tell you we still obviously have work to do in 2021, I don't we're not going to get there in 2021 and frankly some of the other hill's revenue climb around COVID-19 and the weights.
Hopefully that's going to moderate and the back half of the year as things as Jim mentioned, if vaccines get out there and things start to moderate and whatever to normal and the back half of the year. We're also going to have a better view of what the residential waste are going to look like long term what I would tell you. It is not lost and that mix is the fact that our price and yield and residential continues to.
These strong despite what's going on with CPI and we've talked about debt for the last handful of years and the other part that's part of that equation is while we talk about the recycling business improving a big piece of the recycling business effects residential. So when you look at those margin improvements we're overcoming some of those other headwinds that weren't there. When we started this initiative so to speak.
Okay, No that's very helpful and I'll turn it over thanks guys.
And the tenor.
Thank you. Your next question will come from the line of Kevin Chiang from CIBC. Your line is now like go ahead.
Okay. Thanks for taking my questions and hope everyone is safe as well.
Maybe just turning to one of your prepared comments around.
I guess, you're seeing an acceleration and some of the technology initiatives, you've had I think you've called a triple digit rate increase and your online sales channel for example.
If I recall at your Investor Day, you can kind of laid out a bunch of technology initiatives and I think in aggregate that was gonna generated $150 million of savings or what kind of earnings opportunities just.
And just as you sit here today through the pandemic.
See the ability to achieve that.
Coming sooner.
Upside potential potentially bigger just given maybe the changes some of you.
And some of your customers' behavior through the pandemic.
Yes, so to.
To answer that question.
And at least it's hard to say, whether it is a bigger opportunity for us, but because we've chosen to accelerated and then you would expect that the that the impact would happen sooner for us.
And we're touching really and this but this this is a huge transformation for us I mean, we are literally.
Digitalized and the entire relationship from the very front, and which is where we set a customer up all the way through the routing and dispatch and collection functions and and all the way through billing and.
And the back into the process. So it's a it's a massive effort for us but it felt like it was the right thing to do to accelerate it and so when we talked about that on and Investor Day I would tell you that.
And then it would make sense that by accelerating the spend we would also accelerate the benefit I don't know whether the benefit is necessarily bigger because some of that is dependent on on how much differentiation, we create and that.
It is maybe less dependent on us and more dependent on weather competitors choose to do the same thing, but we do believe that having a into two and customer experience, that's digitalized as something thats almost becoming Jim.
The ante to get into the game anymore. It seems as if every company that did well and in Q2 and this thing hits.
And we're digitalized and some way shape or form and so we felt like this was absolutely the right thing to do for our customers and we do believe that it gives us an opportunity to grab a bigger slice of the overall pie.
And particularly with those those away from competitors that don't choose to make those investments we know that some competitors already are making those investments or will be.
But that pieces of maybe a little harder to quantify.
That's helpful.
And maybe just turning to.
Long term debt.
Leverage ratio, you're looking to get that back to two and a half to three times.
But I guess, if you take a look back I mean, a lot of your comments around the resilience of the business.
And you outperformed kind of expectation that as you go through a challenging year. Just wondering how you think about your capital structure and if it.
If there's an argument that maybe two and up to three times might be sub.
Suboptimal for our company given the resilient and see you have and your.
Earnings stream.
How do you think about that debt and.
And the context of what you've gone through and 2020.
I think it's a great question and there is no doubt debt producing and the free cash flow and EBITDA debt.
Waste management did in 2020 and the face of a global pandemic is a strong affirmation of the strength and resiliency of the business.
And so arguably it certainly could position and waste management taken and set or a higher leverage ratio than we had historically that being said our focus on that long term range at two and a half to three times.
Considering.
Through cycle.
Financial position that we look to achieve.
And also establishing and financial flexibility for strategic opportunities and so we want to be sure that we arent just positioned to weather a storm so to speak but we're also positioned to be opportunistic to grow the business over the long term and Thats why we think that two and a half to three times is the right.
Level four.
Our strategic value for value creation for shareholders.
That's a that's a great color. Thank you very much I'll turn it over here.
Thank you. Your next question will come from the line of Jeff Goldstein from Morgan Stanley. Your line is now like go ahead.
Hey, good morning.
And your prepared remarks, you mentioned, you mentioned commercial yards and industrial hauls declined 5% to 6%, but overtime decline between 15 and 18% I was just curious what are you doing to drive that Delta and how we should think about the sustainability of that delta and the future.
Well, I think Jeff and <unk>.
And the sustainability when you really look at where we bottomed out in Q2, and then you look at Q3 and Q4, while the volume declines have risk essentially been cut by more than half, we still been able to keep out a proportionate amount of overtime and it's really just us being really focused on making sure as volumes fluctuate we optimize each day.
And each week when it comes to the people and the assets. The operating team is doing a really good job of holding on to that as we bottomed out and then as we've come back we've just been able to maintain that same level of discipline about making sure that we're maximizing each day and each week on and asset basis.
Okay got it and.
And then and then thinking to the 'twenty and 'twenty, one core price growth guidance of 4% can you parse out your expectations across commercial and resi industrial and landfill.
Well the price increases being relative lockstep or are there. Some areas you expect to see more strength relative to others.
Well I think if you if you look at the trend avoiding and break it out by line of business, but I think overall, if you look at the trend from again, where we bottomed out to where we finished the year. The second half of the year Q3, and four trends into Q4, I think you follow those forward proportionately with each of the lines of business are one area.
Jim commented on in his script was really around post collection pricing, both the day landfill and transfer station, we've talked about that quarter in and quarter out we continued even through the pandemic to show strength.
And resiliency and those two buckets and I commented on residential and that has been even pre pandemic, a real focal area for us and while it did moderate a bit and the bottom of the pandemic. We showed progress out of that so I think we feel comfortable with.
With at least at 4% going into 2021, Jeff.
The one thing that has been.
The most challenging for us has been that commercial line of business because it's so impacted by small businesses.
And it's also impacted by.
Hospitality, it's impacted by by schools and addition to small businesses. It's why we like the the industry honestly.
As you think about and investment thesis, it's why we like where more of our reopened play this industry is and meet with and we might have been in the past because we haven't gone through something like this where everything is shut down and in many cases are are still shut down and so whether it's wm or whether it's any other.
Waste provider. This is a this industry is a reopen play and that shows up on the pricing line as well as the volume line, we have some of the price.
Debt might be perceived as being somewhat.
Somewhat soft and the commercial line of business is really because its volume related price I mean, it doesn't feel morally right to to use our fee based approach, which is a new approach for us, but it's and it's a sophisticated approach, but but you can't go and hits small businesses that are sitting across.
The street from from Wrigley Field, and who are who are typically.
Customers that have berthing business during the baseball season, and now they have nothing because theres no bands you can't hit those customers with fees or with with price increases and and they understand that and we understand that they also understand that when their business reopens that we will increase prices.
As we normally do normal course of business. So there are some volume related.
Rice increases and we simply haven't taken.
And that.
Specifically impacts that commercial line of business other lines as John talked about that are doing doing quite well our landfill and transfer residential obviously has gotten a lot of focus so we feel very good about the about pricing and theres been absolutely no loss of discipline.
That's hard coded here, it's just that there is.
And we're waiting for some of this volume to return before we feel like it's the proper time to really reapply.
That's very helpful. Thank you.
Yes.
Thank you. Your next question will come from the line of Jonathan Silver from BMO capital markets. Your line is now like go ahead. Please.
Thank you so much.
Higher quarters, you would given us some color on your commercial and industrial clients in terms of service status and what percentage of those customers have come back what percentage are not coming back and I'm. Just wondering if we can get an update and what you think we should expect for the rest of the year.
Yes, Jeff.
And we were probably in the high <unk> approaching 70%. The last time, we chatted and I would still tell you, we're hovering a little bit better and that rate and the 70% range and as Jim mentioned the real GAAP. There is just around those businesses have and a return it's really hospitality that referenced the Wrigley field travel and lodging those kinds of things. So I think the good news is is that if you look at how well the biz.
<unk> performed even without a lot of those small businesses being back online and we feel very confident of those.
Businesses come back we will emerge from this.
Even stronger I would tell you where we are.
And when you look at our margin performance relative to that as well I think that's also a testament to how well we performed and the gyms and to Jim's comment. This is a reopening story and I think for the industry and specifically for US we feel very confident about how the business performs as things start to reopen really and the back half of the year.
Alright, thats great to hear.
My follow up question, you talked earlier about some of the potential regulatory issues from the binding and administration and I wanted to focus on something a little bit different.
And Theres a proposed federal net.
Minimum wage at.
And at $15 an hour I realize you probably pay more than that but when we've seen minimum wage increases and some of your territory. Some of the states. Some of the cities has that put upward pressure on wages for you and if so are you able to pass that through to your customers.
Yeah, I think it's a great question and it's one that we've been evaluating I think the most important element of debt for us is that we've been.
Pettitte wage per as a company for many years and and so while our minimum wage could certainly.
Actively.
Raise the tide with regard to where wages are we see that as something that wouldn't get proportionally impact our business and then that is something that we are ahead of in many respects because of where our wages have been historically, it's certainly something that we see the ability to consider as we if we see that that raising.
That rising tide impact our cost structure, it's something that we would respond to you on the price side of the business.
Okay.
Right the color. Thanks, so much.
Thank you. Your next question will come from the line of Noah Kaye from Oppenheimer. Your line is now like go ahead. Please.
Hey, good morning, everyone and thanks for taking the questions.
Jim I, just want to pick up on what you were saying previously around.
Some of the pricing considerations related to volume coming back.
And it is really about sort of how pricing and.
Yield.
Cadence and they trend over the course of the year, one might think that just because first.
And first half of 'twenty and 'twenty yield comps are a little bit easier relative to the second half and you have the CPI headwind and the back half of the year that.
And you would see better pricing and the front half and ease up and the back half, but it sounds from your comments like that there may be just more open market pricing power, even envision and later in the year and so perhaps pricing will be more ratable is that a fair way to think about it or can you just jeremy properly.
Yes, I think that's a fair way to think about it.
And we have different approaches to different lines of business, So landfill and transfer honestly had not gotten the focus that commercial and gotten until probably two years ago. So we've been very focused on landfill and transfer pricing and.
And.
And so.
Similarly, we've been very focused recently on residential and John talked about that probably for the last four quarters I think commercial is as I said it's.
We've really established and more sophisticated based approach to commercial pricing.
But we do have.
A significant percentage of those commercial customers that are small businesses and.
One and one that we did mentioned necessarily this morning, but as schools I mean schools are.
And make up 12% from our commercial business and in some states.
And I hate to even think about this but some state schools haven't returns.
So and that's that's great schools at high schools and Thats universities, that's a big part of our commercial business. It's a part of our industrial business as well, but but when it's 12% of your commercial business.
It makes a difference and you're simply not able to to price increase customers who.
Either haven't returned or have returned sparingly. So we think schools.
Are a huge focus at the state level and the federal level and that day.
And so the kids need to get back into school and and so I think youll see the schools reopen fully as we get through the vaccine and and and we see that in the back half of the year.
Yeah, and I wanted to talk and that really sets up and more medium term to longer term question.
Around the cycle here.
One would look at the typical indicators you know very robust housing starts activity.
God willing a full year of reopening and 2022 and then it certainly looked like PPA is going to be higher for 'twenty one versus 'twenty.
Does it seem right to you that we may have some acceleration of growth and 2022 and.
And how are you aligning the business for that if so.
Yes, that's share it seems like a logical conclusion to me.
It feels like this economy is ready to really take off like a like a space show.
And so we're seeing some indications of that probably our CD line of business from a volume perspective is the best indicator.
That had been down.
<unk> down in Q2, I mean double digits down and.
And for the fourth quarter, our C&D volume and.
And Orlando was up five 5%. So that's starting to tell me and that's probably one of the best leading indicators that we have in terms of volume that tells me that debt debt.
Or are the toughest pride and it's ready to it's ready to go.
Yeah, Thanks very much.
You bet.
Thank you. Your next question will come from the line of David Manthey from Baird. Your line is now live go ahead. Please.
Thank you good morning.
I was hoping you could update us on the current levels and your year end 2021 targets for the percentage of municipal contracts that are linked to a more representative water sewer trash CPI index as well as fee for service recycling contracts.
So what we've traditionally said is about 40% of our revenue is somehow is somehow index.
The better metric to look at is really what we've done on core price and yield within residential over really the last six or seven quarters and looking at Dominion and make sure we've shown progress and each and every quarter, including three to four and throughout 2020, and we expect that absolutely to continue in 2021.
And I did mentioned in my prepared remarks that we did shed a little bit of business here in 2020, but as I've mentioned and a number of these calls if it doesn't meet our margin and return criteria, we're comfortable doing that it's not our intent, but we're going to make sure that we deploy our capital to where we get the get.
And get reasonable returns and margins and I'm not sure John and what percentage, we can get you the percentage for water sewer trash and.
Suffice to say it has gone up and in fact, we've seen.
A couple of contracts come across my desk, where we are where we've won the bid and we've increased and off of some of these indices that really werent representative of our cost structure to water sewer trash, but demo John the exact percentage, we can get you that percentage of our Ed We'll circle back with okay. Thanks and.
And that number.
Okay. Thank you.
And then as you work to get the highest cost mile off the road for modeling purposes.
Is it more relevant to compare overtime trends in 2021, with maybe 2019 and.
So.
And what would like a 5% more or less kind of decrease something and it would be reasonable just given the wild swings, we saw and over time and.
2020.
I don't know if I'd go back to 2019, what I would look at is where we bottomed out and Q2 and what our overtime percentages, we're going into that and how we've come out of it to me that's really been the barometer is as volume declines have really come back more than half and commercial and industrial waste for obvious reasons residential is a little different but we've been able.
To outpace the volume increases if you will from and overtime perspective for us to be down mid teens and over time with still 567%.
Volume declines is pretty impressive so I don't know about 2019.
David I think the better barometer for US is how we've done in 2020 and how we progressed from the peak.
Volume declined to where we are now and I think as I mentioned and Thats, what gives us confidence going into 2021, and then add and the benefit is of us getting into the integration of the <unk> customers. After we might migrate the data here in Q2, all those things I think Ed up to a really positive outlook for us and the Opex side.
That makes sense. Thank you.
Thank you and your next question will come from the line of Sean Eastman from Keybanc Capital. Your line is now like go ahead.
Hi, James Thanks for taking my questions.
I just wanted to dig in on the.
You know kind of the free cash flow bridge from 'twenty and 'twenty to 2021, I mean again quite a few moving parts. It seems like we should be building off of.
And $2 $2 billion number and 2020 and essence, but devine and maybe if you could just kind of give us a simple kind of a rundown of that debt.
And those moving parts from a free cash flow perspective, that'd be great.
Yes, so the $2 $2 billion debt.
And you remark on is a good place for us to start I think when we think about EBITDA growth always being the biggest contributor there certainly have strong outlook for.
EBITDA and the year ahead with the 10 to 13, 5% increase on a year over year basis, and addition to that we expect the about $90 million benefit from lower cash interest that I mentioned cash taxes will increase and with those two items going and the opposite direction and we estimate that to be about one.
$125 million to $150 million, there will be a benefit from the fact that the company.
And paint the transaction costs and that is and your $2 $2 billion base, So I want to be sure.
And that out because the ABS transaction costs are something that we adjusted for and coming to that $2 2 billion.
And we will have a slight increase and the money spent on the enterprise resource planning.
And that we've discussed we expect that to go up $15 million on a year over year basis. So all in all of that what gets you to your cash from operations increase and the ballpark of $500 million to $600 million and.
And we've got a capital expenditure increase.
And $150 million to $250 million and then proceeds from divestitures were not.
Forecasting anything significant there have given our traditional range of $50 million to $100 million.
Okay Super helpful and.
Next one from me is just on R&D and it sounds like this is going to be a growing piece of the business and be helpful. Maybe just to get some context for how significant of an earnings driver you foresee this being and maybe five to 10 years and.
Maybe as of today.
Is there a rough idea on what the sensitivity and EBITDA as to RIN prices today.
Yes, probably and alternatives could take a shot at this one.
I'll go first and then and I'll just pick up the pieces that Tri Ed.
But.
I think look I think.
It depends a little bit on your first question Ed.
Depends on how we choose to grow this business I mean, you could you could make a case that you grow this business outside of our own.
Outside of our own balance sheet and and so.
So we are we have not gone down that path, but if you wanted to really.
Kind of blow out this business and a good way and take advantage of what we think is going to be a long term trend for rins pricing you could do that or we can grow it within our own business within our own balance sheet and so we haven't made a decision. There obviously to date everything has been grown out of our own capital expenditures. So.
And anything that we're contemplating probably at least for the first half of 'twenty one.
And maybe for the entire year would be grown through capital expenditures is divina mentioned in her prepared remarks, but we do think that this is a.
As I said there is a.
Our long term uptrend here for commodities and.
And so that's why I believe it benefits us disproportionately regardless of where you look at it and our earnings stream, whether you look at renewable energy with a $2.50 RIN pricing or whether you look at at our recycling business.
We're the biggest recycler out there and we feel like this is a.
And more of a three to five year trend Theres a number of reasons for why we see that I mean.
Commodity that obviously had been and a pretty a pretty heavy.
And if you will.
And so but if we look just at our own business.
We see that there is there is increased demand for cardboard for example, that's driven by.
And what we've discovered and the pandemic that everybody is taking delivery of.
Of Amazon boxes at their houses so that so we feel like all of these businesses that have commodity price exposure looks to have and they look to have a fairly long uptrend coming and Thats. Why we are excited about the prospects of whether its a recycling business or our renewable energy.
And that renewable energy business by the way is made possible by the fact that we have 60% to 70% of our fleet is natural gas and that also is something that can't be matched in the industry percentage wise I hope that helps answer some of the Johnson and the only thing I would add there with the New administration I think two things that the new administration will deal with the <unk>.
<unk>, which is a renewable volume obligation and the small refinery exemption, which are two buckets that are really driven RIN pricing and the past right because theres been a lack of clarity on that and I think if they stabilize both of those we're going to see some more stability and RIN price and whether it stays at $2 50, or whatever but I think we will see more stability and I think that's going to help inform us where we deploy our oil and gas.
And EBITDA for the renewable energy business was up about $50 million in 'twenty and 'twenty. What's important to note is that that wasn't all price related and some of that was our intentional investment as Jim mentioned that we've been making over the last three to four years. So it was volume and price acceleration and <unk>.
2020 that per.
And at about $50 million and EBITDA growth and we see about a 10% to $15 million improvement and 2021 based on where written and prices were at the end of 'twenty and 'twenty.
Okay got it very helpful. I'll turn it over thanks guys.
Thank you.
Thank you. Your next question will come from the line of Michael Hoffman from Stifel. Your line is now and go ahead.
Thank you very much and I appreciate you staying on here with this long.
I wanted to just touch on the service interval trend assumption in your model.
I think I heard correctly as you did you had a favorable improvement and <unk>, but youre not assuming it continues to improve its stable and therefore, that's upside if the housing cycle converts into new business formation.
And the way that I would look at that Michael is our volume guide at the macro level for 'twenty and 'twenty one is about 1.5%.
Volume growth clearly a lot of that is built into the second quarter, just coming off a very low base of Q2 and we.
We do see some upside and the back half of the year.
From a service interval perspective, I wouldn't say that we took that volume guidance to the different.
Different parts.
Different lines of business, specifically, such that I can bifurcate what of that is commercial or industrial.
But what we looked at based on how our cost structure.
Founded in 2020, and we think that the contribution margin that volume is around 40, 45% and the euro.
But Michael one of the earlier questions about does the economy feel like there is a lot of momentum behind it that's ready to really take off once we get past. This I think the answer is yes. We just we're just because we don't have a ton of control over that.
That's the one that we don't have really much control over which is volume.
Because of this.
When the when the pandemic starts to the effects that are start to lessen so.
Your question is about is there conservatism and this volume forecast of one 5% I would tell you that the answer is probably more likely yes, and no but it's it is largely dependent on when this reopening comps, but as I said to the earlier question I, absolutely believe that that's a logical conclusion that this economy will be ready to take off.
And once we get past it.
And yes, that's where I was getting to as you know the history as household formation drives new business formation, and we're at $1 five and change starting with 300000 more than it's been for five years. Some point here the empty storefronts backfill.
That's right. It is on a dry cleaner you need another drug store or what have you and and that's a box that and that service interval growth.
Yes and goodbye.
And that's right Michael.
Just to be clear.
Cadence wise.
Based on how you ended the year it looks like you could actually be flat.
And just barely negative on volume and <unk>, and then have a nice pop and and settle into a lower but sustained trend and the second half and Mike.
And about the cadence correctly, though.
Michael I certainly you can do the math and get there I think we saw a lull in late November and December but the good news as I mentioned earlier is that through the first six or so weeks, we've been encouraged by what we've seen on the volume from now six weeks does not make a trend but to your question and relative to Q1, and we feel pretty optimistic through the first six weeks anyway in terms of volte.
<unk>.
Okay and then.
Divina and if I could try a different tact on our waterfall and two things the EBITDA and the free cash and the year at four three I'm rounding you guided to for <unk>.
It looks like advanced would be about $2 60 incremental and.
And you get recycling Jon mentioned 45, you mentioned 10 to 15, and Rins and that leaves seem to like 190 coming from solid waste.
And I thought about that sort of the pieces and the right zone, there correctly and the EBITDA.
Go from four three to four eight.
So we have and expectations for the Avs business, a little north of what you just projected we have net $50 million increase and technology that I mentioned earlier that is not part of your bridge and then we have the.
And known cost headwinds that I mentioned, so you can think of that as being specifically related to health and welfare cost risk management costs and incentive compensation.
Those are about $100 million in the aggregate so does and the pieces of the bridge and addition to what you outlined.
Okay and then.
Just trying to piece together the question that was asked earlier about the free cash flow of one so.
It seems like you'd started the TUI two because you paid the cares act back. So that's gone and you go into two three that's 220 million roughly year over year.
Net.
But the absolute is actually closer to 300, because you've got about 100, and some million dollars of cash tax and.
Yes.
And the like ERP.
So I'm really I'm looking at it sort of a growth 300 improvement and then offset by some cash tax issues and ERP.
Is that did I get that I put those pieces together about right.
Yes, yes. He did okay. So last one and I know you and I do this all the time.
<unk> you.
Once defined your baseline free cash is $2 billion and I just wanted to ask us and my looking through the lens correctly and what I think your own self help opportunities our debt.
<unk> brings and 150 to 200 eventually working capital has the potential for $1 50 to 200.
And the other 75, so there is a $3 75 to $4 75 baseline upside again, it might take a couple of years to get all of that.
Before I, even introduced 5% to 6% annual recurring growth and the cash and my thinking through.
This correctly and if I am all of that self help.
Need anything to happen and the macro that's something you can do.
Yeah. The only thing so I agree with you, 100% net working capital and free cash flow flow directly to free cash flow. The technology additions that we've mentioned you would have to tax effect. That's the only other item that I would clarify on what you just did but otherwise I think.
And the same play and then I'm not sure Michael and how much of kind of your very first question what is factored into your math, there which is.
And economy that grows at a faster pace and a normal economy because of this reemergence I don't know how much of that is in there, but we do believe thats real we just haven't put it in to 2021 yet.
Yes, well that to me. It just takes your baseline growth rate of five six and it turns into a six to eight.
That's right.
And lastly would you talk to us about how inflation influences your business model I think it's a positive and the camp that you love inflation and that just helps pricing leverage book can you talk about that.
I guess.
I'm not sure I would say I love inflation, but.
Yes.
And so I get your point I mean, we are good and passing it through through our pricing.
Mechanisms and so.
While we are and and.
And maybe the best example of that is been landfills, where we've seen inflation.
On the cost side of our landfills for probably two years and.
And as a result, we've started to get quite a bit better on pricing at the landfill and transfer station. So we do expect that debt.
Inflation has been extraordinarily low for quite a long time I don't know that that lasts for a lifetime. So I think we will see inflation ticked back up and certainly on the commodity side and.
But we will do a good job of making sure that gets pass through and and add some margin to it through pricing programs and the thing I would add to that and just leverage on that as we see better execution with technology to optimize the back office process as we've talked about and.
And John and team drive the organization to be more efficient on the road every day, so we've seen tremendous operating and SG&A leverage and debt.
Helps us to combat inflation, and so those things give us leverage and in an inflationary environment and box.
Right.
All such your internal cost inflation, and then the incremental leverage on inflation to your price spreads just drive incremental margin expansion and free cash flow growth.
Absolutely.
Thank you very much for taking the questions and I hope everybody is safe down there given the weather.
Thanks, Michael.
Thank you. Your next question will come from the line of Michael Feniger from Bank of America. Your line is now live for Hudson.
Hey, guys. Thanks for.
Squeezing me and I appreciate it Jim.
Following up on <unk> question around the new EPA and and the piece to ask question Theres, obviously, a lot of headlines around superfund sites and designation of the chemical and liabilities and lawsuits is there any direction or regulation, you're specifically looking for that we should keep an eye out for.
For that that wood waste things, a certain way or is it just kind of status quo in terms of your investments there and what you guys have been doing for the last few years.
Yes, Michael I think it's probably.
It's still a little bit early and that game. There is a lot of discussion around P fast but.
So I'm not sure that it's not that we don't have a strategy.
From a from a lobbying standpoint, we do have a team and DC that is is looking at this closely.
I guess the main thing I would say about <unk> is that while some people are looking at it as a as a cost.
And we're looking at and as an opportunity for US I think I think.
It goes back to I think the original premise of your question, which is it.
And if something changes environmentally through EPA as a result of the new administration and part of it might be fast.
How does that affect us and and we think it actually has potentially a positive impact and that's why we're looking at it as an opportunity as opposed to just to cost and Jim. The one example, I gave us and you think about contaminated soil and that's a place where this resides regularly and we look at our landfills as being a perfect solution for that with the right technology on the back end.
Absolutely.
That was that was really helpful. That's good color and Jim and just lastly, just let me get your Big picture view on on M&A I mean, the avs integrations underway. The approval process was certainly longer than anyone expected. Some of your peers are expecting another sizeable year of outsized tuck ins.
Just with so much consolidation underway right now I'm, just wondering if long term M&A.
And at least management shifts are we shifting to find new markets and you guys to grow into outside of traditional waste with what's kind of played out and the last few years.
I guess, that's possible I mean, I guess, what I can tell you with 100% certainty is we're not doing any more big solid waste acquisitions because.
Part of the reason that this took as long as it did was was COVID-19 related part of it was just the complexity of it I mean, it was a complex <unk>.
Transaction and a space, where both companies and played a major role we were number one and the space and <unk> was number four so so there was a lot of complexity. There was a lot of work to be done with Doj and so I really don't expect that at least Wm with do another large solid waste acquisition.
In North America will do tuck ins and to <unk> point about $100 million is where we think will come and this year. So I think we can continue to do tuck ins and then as far as our strategy for M&A.
And I think what we have all chosen to do is just really focus right now on the integration of ETS and once we feel comfortable that thats been well integrated and start to think about what acquisitions look like any in the years beyond 2000, and 'twenty one 'twenty two 'twenty two.
Thank you.
Our next question will come from the line up.
Stephanie.
From Jpmorgan. Your line is alive and go ahead. Please.
Hi, Good morning, I just wanted to ask a question about kind of your longer or medium term growth algorithm and.
So.
And you got your Investor Day, you had laid out that average yield it could be about 2% growth being about 2% and.
That's right.
10% of EBITDA growth I was wondering if maybe eds or it has changed the algorithm or if it's too early to tell at this point.
Yes, I would tell you it's too early for us to tell at this point.
And the one thing that we did and we've mentioned from the time that we laid everything out at Investor day was accelerate some of the technology spend and that acceleration of technology spend is one of the things that has.
And kind of put a little bit of downside pressure on the growth rate and EBITDA that we had talked about but we expect that Q provide and acceleration of the returns coming in.
And in 2022, I would only and divina debt when you think about when and how we bought and yes. They were very similar to us in terms of the volume declines they were suffering through Q2 and Q3, so as Jim talked about the traditional business being a reopening story. We think there is obviously some leverage of avs business now tucked in reopening and us getting the same lift out of debt.
Net.
Good point, okay, okay, great. Thanks for that color.
Thanks, Stephanie.
Thank you and fragrances and.
And I'm not seeing any further questions from the phone line at this time you can go ahead and continue.
Okay, Thanks, and just to wrap up today.
There have been so many challenges and this year that we are all faced and.
And.
Of course includes and thank you by the way for all of your comments about what's going on and Texas. This week.
And honestly for those of US here and felt like Hurricane Harvey part two a little bit.
A lot of damage to homes, including my own house and.
Big Big percentage of the stay without power without water et cetera, not share that needed to be that way honestly, but what it was and so.
I guess the positive coming out of it is that it tells me that the human spirit is alive and well.
And we at Wm ore and our personal lives we take care of each other during these difficult times and so thank you to all of our 50000 teammates.
And for all you do each and every day and thanks to all of you on the call for joining US. This morning, we will talk to you next quarter.
Thank you Sir thank you so much presenters and again and thank you everyone for participating. This concludes today's conference you may now disconnect.
And have a lovely day.
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