Q3 2021 Waste Management Inc Earnings Call
Good day and thank you for standing by welcome to the waste management third quarter 2021 earnings release Conference call.
This time, all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press.
Star Zero I would now like to hand, the conference over to add ankle. Thank you. Please go ahead.
Thank you Erika good morning, everyone and thank you for joining us for our third quarter of 2021 earnings Conference call with me. This morning are Jim Fish, President and Chief Executive Officer, John Morris Executive Vice President and Chief Operating Officer, Davita ranking executive Vice President and Chief Financial Officer.
Prepared comments from each of them today Jim.
I'll cover our high level financials and provide a strategic update John will cover an operating overview and Davita will cover details of the financials.
Before we get started please note that we filed a form 8-K. This morning that includes the earnings press release and is available on our website at www Dot <unk> Dot com.
Or 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 as updated by our subsequent Form 10-Q filings.
Rob will discuss our results in areas of yield and volume, which unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume.
During the call Jim Jones, being able to discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons unless otherwise stated will be with the third quarter of 2020.
Net income EPS operating EBITDA margin operating expenses and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations.
These adjusted measures. In addition to free cash flow are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www Dot W. M Dot com for reconciliations to the most comparable GAAP measures and additional information of our use of non-GAAP measures and non-GAAP projections.
This call is being recorded and will be available 24 hours a day beginning approximately one P. M. Eastern time today until five P. M. Eastern time on November nine.
To hear a replay of the call over the Internet access the waste management website at Www Dot W. M Dot com.
A telephonic replay of the call dial 8558592056, the reservation code 6835518.
Time sensitive information provided during today's call, which is occurring on October 26, 2021 may no longer be accurate at the time of a replay.
Any redistribution retransmission or rebroadcast of this call in any form without the express written consent of waste management is prohibited now I'll turn the call over to waste management's president and CEO Jim fish.
Thanks, Ed and thank you all for joining our third quarter performance highlighted the exceptional cash generation capability of our business model as we generated nearly $1 $2 billion of cash from operations.
Our solid results put us on track to meet the higher full year financial outlook, we provided last quarter, even as we face some of the highest inflation that we've seen in years.
Along with the labor and supply chain constraints.
Virtually no segment of the economy, including government and the private sector has been unaffected by these historically acute inflationary and supply chain challenges.
Disbursement inflation accelerated through the third quarter and during the quarter, we saw roughly $60 million of labor inflation at about $100 million of inflation and other operating cost categories overall, our underlying labor inflation for the third quarter was eight 7%.
So that's the tough news the good news is that the business continues to perform well as demonstrated by the fact that we still expect to finish the year within our previously adjusted operating EBIT Rea's, adjusted operating EBITDA and free cash flow guidance ranges.
And we will be above our prior revenue range due to strong price execution and strengthening volumes.
Jamba, Dana and I will discuss what we're doing about these labor and inflationary pressures in the short term and the medium term.
Not surprisingly our disciplined price programs are the primary lever to combat cost inflation.
Our pricing programs delivered core price of four 6% and collection and disposal yield of three 5% in the third quarter.
Standout performance continues to be the residential line of business with a yield of 5%.
While MSW yield improved to three 5%.
But keep in mind the price Escalations on about 40% of our revenue are tied to an index often based on a look back over the prior year.
So theres, a timing lag and adjusting index pricing on cost step up as quickly as they have.
It's important to understand that a portion of the remaining 60% of our business won't get the full 7% to 10% price increases we believe we need to cover rising costs until their next price increase cycle.
A customer who has increased 4% in may wont get the full cost recovery price increase until next may.
That said, we're seeing a favorable price environment across our open market business as evidenced by our lowest level of rollbacks in more than a decade.
We're very focused on directly addressing the labor challenges John will discuss the quarterly impact.
We're working to address this immediately.
Strategically we're looking at this acute challenge as an opportunity to expedite the automation of certain jobs.
We said previously that we view the automation of certain high turnover positions as both a competitive advantage and a derisking mechanism in today's labor market, where certain jobs simply don't attract interest it previously did.
The most recent examples of that are the customer set approval, which we just finished fully automating and a 35 plus percent reduction in labor, we've seen where we.
<unk> upgraded and rebuilt our single stream recycling class.
The success of these rebuilds and the labor inflation challenges of late.
We've accelerated the retooling of the remaining single stream plant and expect to address 90% single stream volume by the 'twenty two 'twenty three 'twenty 'twenty four time frame.
In the quarter, we saw some of the positive impacts of those new single stream plant and our outstanding performance in our recycling business.
Earnings contribution and margins for recycling were at their highest level ever driven by strong demand for recycled material and great operating performance from the new state of the art nurse.
We were equally pleased.
With the results in our renewable energy business in the quarter were robust growth continued driven by more rental sales at higher prices.
With our longstanding expertise continued growth and sustainability solutions and unrivaled asset network Wm is uniquely situated to support our current and prospective customers and their evolving sustainability needs.
Our customers are increasingly seeking circular solutions for their materials.
Which is causing growing demand for recycled content.
Of note our.
Focus on unlocking more plastic from the waste stream drove a 25% increase in plastics, we recycle since 2019.
Recycling and renewable energy are two of our key growth areas highlighted in our annual sustainability report published earlier this month.
The report outlines the progress <unk> has made against our sustainability goals and details investments we've made to advance our sustainability journey.
In particular this year's report focuses on the people behind the progress <unk> has made in the past year and how they are doing their part to take care of our customers neighbors and the environment and communities across North America.
The bottom line for the quarter is this we generated higher than expected volume and revenue growth in the third quarter, which positions us well for 2022 at the same time, we faced an unexpectedly acute and fast moving challenge from the inflation supply chain and labor shortage headwinds and we managed our way through it well and still.
We expect to achieve results within our 2021 guidance ranges.
And this challenge presents an opportunity for us to move more decisively in those strategic areas of automation sustainability and workforce planning to further separate ourselves in this industry.
In conclusion I'd like to thank the nearly 50000 people on Wm success. They continued.
To deliver driving another quarter of double digit growth in revenue operating EBITDA and free cash flow I'll now turn the call over to John to discuss our operational results for the quarter.
Thanks, Jim and good morning.
Team continues to execute very well, despite a challenging operating environment producing more than 7% organic revenue growth in collection and disposal business in the third quarter.
This growth combined with continued integration of advanced disposal drove operating EBITDA more than 14% higher.
As Jim mentioned, we are seeing pressure on labor and other cash cost categories and we are addressing these impacts from our pricing programs controllable cost management.
Cincy improvements and workforce planning.
Adjusted operating expenses as a percentage of revenue increased 180 basis points to 62, 2% in the third quarter as we experienced pressure from inflationary costs supply chain constraints and stronger than expected volume growth.
In particular cost related to the hiring and training of new employees impacted labor costs in the third quarter. We also saw overtime hours increase as the team adjusted to meet the higher than expected collection volumes, we anticipated a good portion of this labor pressure that has shown up on our costs as we made proactive market wage adjustments earlier in the year.
To get in front of labor shortages and meet growing demand at the same time, we're working to automate a number of roles, where we see longer term challenges to attract and retain employees.
In our residential line of business, we continue to work through the last 40% of our routes, including those from Etfs that are not fully automated while continuing to be very selective in the business. We are willing to take on as evidenced by our yield and volume results in the third quarter and the last few years.
While we are now incurring the costs associated with these investments we're only in the early stages of seeing the benefits.
The labor market supply chain constraints that big salaried in Q3, coupled with robust volume growth in the third quarter.
I'm also added pressure in our fleet operations.
Fair and maintenance costs are increasing as we hire additional technicians and incur some overtime hours to address the strong volume growth. We continue to see in the collection lines of business.
Early we've had a temporary had to temporarily placed some of our higher cost struck back in service to address the volume demands.
In addition, our third party subcontractors at our transfer stations are facing similar pressures and are passing those increased costs onto us.
Overall efficiency in the collection business in the third quarter adjusting improved in the collection business in the third quarter adjusting for increased training hours.
Fundamentals of our business remains strong and we are committed to recovering our cost increases through pricing and again, taking the most expensive truck off the road and reducing the most expensive hour of the day.
Now I want to focus on several of the positives in the quarter turning to our strong revenue results third quarter collection and disposal volume grew by three 8%, which outpaced our expectations.
We continue to see strong volume driven by economic reopening with commercial volume up four 6% and special waste volume up by 16, 6% and.
And we see runway for continued solid performance in the fourth quarter.
Customer metrics were also strong in the quarter service increases outpace service decreases by more than twofold for the second consecutive quarter and churn was eight 7% year to date net new business for small and medium business customers is up more than 10% and.
And finally, our integration of advanced disposal continues to go smoothly, we've combined around 70% of the acquired operations into our billing and operational systems and we remain on track to migrate virtually all the Acs customers by the end of the year.
We've achieved nearly $26 million in annual run rate synergies during the third quarter, bringing the year to date total to $60 million.
Combined with the $15 million of annual run rate synergies realized in the fourth quarter of 2020, we're on track to reach $100 million by the end of the year and we continue to forecast another $50 million to be captured in 2022, and 2023 from a combination of cost and capital savings.
Our teams are working tirelessly to provide safe and reliable service to our customers and communities I don't want to thank them all for their efforts and with that I'll turn the call over to Divina to discuss our financial results in further detail.
Thanks, John and good morning, everyone.
As we have seen all year, our best volume growth strong recycling commodity prices and increased collection and disposal core price.
Continued to deliver top line growth ahead of expectations in the third quarter.
As a result, we are once again updating our revenue outlook for the year.
Total company revenue is now expected to be between 17% and 17, 5% with yield and volume in our collection and disposal business about six 5%.
This guidance also includes an expectation for continued strength in recycled commodity prices and value.
We're confirming our most recent 2021 adjusted operating EBITDA guidance of between 5 billion and $5 $1 billion, which is an increase from the prior year of about 17% at the midpoint and almost 7% almost 5% higher than our initial outlook for the year.
Third quarter SG&A was nine 7% revenue.
40 basis point improvement over 2020.
Included in our results is about $16 million of the increase digital investments as we advanced technology that will benefit customer engagement and lower our cost to serve over the long term.
We remain focused on managing our controllable spending making sure that we allocate each dollar extra initiatives that will enhance our business.
Third quarter net cash provided by operating activities was $1, one $8 billion an increase of 15%.
Cash from operations growth continues to be driven by a robust increase in operating EBITDA, including the contributions from the <unk> acquisition and lower interest costs.
While there was a modest unfavorable working capital comparison in the third quarter due in large part to the timing of cash from P&G credit and our deferral of payroll taxes.
Overall improvements in working capital demonstrate the benefit of tools, we're putting in place to enhance our systems and processes.
In the third quarter capital spending was $464 million, bringing capital expenditures in the first nine months of the year to $113 billion.
Our 2021 case of capital spending has continued to be slower than we planned due to supply chain constraints and construction projects are taking longer than planned.
As we discussed last quarter, we are proactively pulling forward capital investment, particularly in recycling, where we know the returns will be strong.
Investments in recycling technology and equipment at our markets are expected to be about $200 million for the year.
While we continue to target full year capital spending at the low end of our $1 78 to $1 $88 billion guidance range, we could see 2021 coming in below targeted levels with some of our spending pushed into 2022, primarily due to supply chain constraints.
We generated $773 million of free cash flow in the third quarter and through September our business generated free cash flow at $2, two $9 billion, putting us well on our way to our full year targeted free cash flow at two five to $2 $6 billion.
We've returned more than $1 $7 billion to our shareholders through the first nine months paying $730 million in dividends and repurchasing $1 billion of our stock.
We continue to expect to repurchase up to our full authorization at $125 billion in 2021.
Our leverage ratio at the end of the quarter with $2 seven one times as the strength of our business performance and the successful integration of the acquired <unk> business drove the achievement of our targeted leverage ratio ahead of plan.
As we enter the final stretch of 2021, our teams are focused on accelerating our disciplined pricing programs managing our controllable cost positioning wm as an employer of choice.
Capturing growing volume, we know our strategy sets us up for a solid finish to 2021.
With that Erica we'd be happy to address <unk> question.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Your first question comes from the line of Tyler Brown with Raymond James.
Hey, good morning, guys.
Okay.
Hey, Jim So thanks for all the color on inflation I know you guys don't give a ton looking ahead on these Q3 calls, but it just sounds like the set up for pricing looks very favorable next year I mean, you've got clearly this inflationary environment you have strong CPI resets and you alluded to an open market, but let's just say it feels very rational.
So just big picture, you know why wouldn't pricing in 'twenty to accelerate pretty meaningfully and do you have confidence that you can price in excess of unit cost inflation next year.
Yes, I think you're right about that Tyler I mean, I think that's probably the single biggest message of the day, which is that yes, we saw some some cost inflation.
Which has been talked about in any business show you watch on television he talks about it and a little bit of it was what it was it was quicker than we thought it was more acute than we thought and the price that is our biggest lever as I said in my in my remarks to offset that is not perfectly timed with that so there is a.
A lag there we've talked a lot about the fact that 40% of our of our business is tied to an index and I mentioned that there is a in many cases a look back on that.
Tyler about 40% of our business and that 40% about 40% of that comes in January. So the price adjustment comes in January about 30% comes in July so 70% of the price increases on that index business come in the first half of 2022, and then the remaining 30%.
If it comes in October and then Theres, a smattering that comes in the remainder of the year. So.
And then on the open market piece I gave the example of the customer the chart the 4% price increase back in May.
And look we still have a customer to keep in mind here, we don't want to go back to that customer and say, hey inflation hit us harder than we thought so we're going to go ahead and increase you buy another six here in October we're going to we're going to do.
Be smart about it and wait until we get to their annual cycle in May of next year, and then will increase them by by the amount that we need to cover costs and improve margins.
Yes, Okay that is extremely helpful real quickly davina so.
It sounds like Theres, a lot going on in the EBITDA margins this quarter year to year I don't know if you can distill it down but can you just help us bridge out that 140 basis points down and EBITDA margin, specifically and some of the key buckets there.
The two primary buckets to look at are really the inflation impacts that we've discussed and then recycling brokerage. So we would say that about 60% of the impact was from inflation and about 40% was from recycling brokerage.
To put a little more color around the inflationary impacts that Jim mentioned earlier that total with $160 million during the quarter, we estimate that our normal inflationary impacts would have been about 60 of that so that was a $100 million in excess of what we consider normal inflationary impact.
And then you you might recall that we had projected that we were going to have about $60 million over and above our normal run rate in the back half of the year. So we think that our cost in Q3, we're at about $60 million to $70 million above what we would have projected.
You can see is a pretty meaningful impact to the overall margin of the business I think it's important to look at our cost structure and see that 35% of our operating costs are labor driven.
And then when you consider our subcontractor cost, which is effectively indirect labor. That's another 15% so 50% of our cost structure is labor driven and we have seen that as a big driver.
And Tyler I would only add that with the additional volume I commented on in my prepared remarks part of what we've done is we're spending a little bit more overtime in the short term to be able to go out of service and take advantage of the strong volumes I mentioned in my comments that kind of outpaced our expectations, which we view as a good thing over the long term and certainly we have a clear line of sight to what those costs are still gonna spoke to.
Okay, Great I'll hop back into queue. Thanks.
Thanks Tyler.
Your next question comes from the line of Hamzah Mazar with Jefferies.
Good morning. Thank you just just a follow up on <unk> on.
On just operating leverage I guess.
And to your comment is it fair to say that you know second half next year is when you'll see greater op leverage just given timing of these pricing resets and and it related to the op leverage how much of your you know cost increase is incremental hiring.
Cause of labor availability issues impacting that versus how much is just resetting your existing labor cost base up there you referenced with you know wage adjustments.
I would also put subcontractor costs into that existing library started I guess.
Yeah. Good morning, I would tell you that when I look at the labor increase whole dollars and this is in aggregate.
About a quarter of it is related to some additional training and hiring we're doing some of that has to do with turnover pressures that I think we're seeing and just about everybody in the transportation industry is saying I think the good news is over the last four or five months, we've actually started to make good progress in terms of our retention rates and whatnot and I think the labor resets, we talked to you last quarter, which are clearly showing up in this quarter.
As well are having an impact Eric the other three quarters of it if you will rough numbers is related to some of the Ot, we're incurring a part.
Part of that as I mentioned is we don't view that over the long term as a bad thing because we're seeing volume increases are outpacing our expectations and I think as Jim mentioned previously to Tyler's question, we have a clear line of sight on what we need to do.
Through pricing and efficiency gains et cetera, and automation to be able to overcome that I do think 70% of that index business resetting in the first half of the year is clearly something we're focused on and as Jim mentioned, our pricing strategy more broadly is not going to change our expectations will have to change to keep pace with the cost increases we've outlined.
Yeah.
Got it very helpful. My follow up question I'll turn it over is just.
Just around you know investment in automation as well as technology.
Would you and I know, Jim you referenced the automation piece being accelerated in and you mentioned the merson you mentioned automation of some customer startup functions, maybe at a high level. What inning are you in terms of automation, what what is there left to do and and and is it just.
Recycling and then also.
As part of that just from a technology perspective again, what's behind you what's yet to come thank you.
Yeah, I think Hamzah, we're probably in the second inning I like using the baseball analogy where.
We are in Houston today, but.
I think we're probably in the second inning here.
A lot that falls under that automation umbrella, it's not just we've talked a lot about customer service digitalization, which is really is kind of the digital side of that.
But the automation that I referred to is while it's technology, it's not technology as we think about it it's not your it's not your mobile device.
Optical sorters at our plants.
And we really have we have 45, I think our single stream plants and we've fully automated.
Four of those plants at this point. So if you think about the fact that we're taking 35 ish percent of labor out.
And to put that into dollars for you it's about a million dollars.
Per plant per month and labor savings.
And think about the fact that we still have.
40 of those plants fortyish of those plants left now some of those plants are at where we're obviously automating the big ones first.
So you won't get a million dollars from the very smallest plant but.
That's a piece of the automation, but to your question.
It's not just those those recycled positions we.
We have a lot of positions that have very high turnover that feel like they lend themselves to automation and we'll be looking at those going forward. So what is what's the total number that would be impacted by that I don't know, but.
But I think it's certainly more than just customer setup, which we fully automated and recycling and then also I want to make one last point to your question to John.
Opex, which we haven't talked about but if you think about the COVID-19 effect, we had almost 900 employees out at the peak and the peak week I think was the third of September.
And we pay those employees, we've made a conscious decision to pay them. So if you think about the impact of that 900, all by the way a lot of those probably over half of those were drivers.
So we are paying them and at the same time, we are picking up their routes with overtime hours. The cost of that was somewhere between two and 3 million Bucks over a two week period. So it's not insignificant and that number of both that 900 by the way is quarantined employees and co.
Employees employees, who have.
The virus that numbers come back down as we've seen it across the rest of it much more manageable number is it's in the I looked at yesterday, it's in kind of the 200 range now down from the peak.
So that that is a that was a short term cost that we that we were bearing.
That was certainly coming back and we won't see that repeat unless we have another another variant that kicks up and causes us to do.
I'll be back in the same position. So I just want to clarify one thing the savings from the recycle plant is a $1 billion per player per quarter for core net promote sorry, sorry.
Ed.
Okay.
Got it.
Thank you so much.
Your next question comes from the line of Walter sparkling with RBC capital markets.
Hey, good morning, everyone. Thanks for taking my question so perhaps this one's for Davina.
Looking at emerging enhancement and you've had a great track record in historic years of of achieving margin margin improvement year to year, but.
Now as you reprice it.
To your repricing is to pass through costs.
You are able to protect EBITDA dollars, but it can be somewhat margin dilutive given the pass through nature. So when we look to next year is there any any any any cautionary.
Are you you're cautioning us too to keep that in mind. When we look at historic margin expansion versus next year merchant expansion given that a lot of your your your revenue is cost pass through revenue though.
Yeah, I would say that what's really important is to go back to one of Jim's earlier comments about the fact that the acute nature of the cost increase that we experienced during the third quarter and the fact that our index revenue is more significantly weighted toward the first half of the year indicates that we had a mismatch in terms of.
When a lot of those price increases are pass through and when we experienced the more acute cost increases we are not in any way, indicating that this is anything other than that log in and kind of a one time.
Our short term I should say impact.
Impact in terms of margin.
Degradation, our outlook remains strong in terms of the business's ability to work both through pricing and operating efficiencies and automation that we've discussed in order to improve the long term margin of the business I think that 2022, you can have some noise in it with regard to <unk>.
Some of these timing differences continuing particularly as you think about the year on year impact of the volume expansion that we've seen in 2021 that our our outlook remains solid with respect to expectations over the long term being one of margin expansion, even with a higher cost structure.
Okay. That's that's great color appreciate that and then my follow up is just with regards to.
Wages.
And the percentage of your workforce that.
It has been repriced, if you want to call it that.
Is there a alert your part or a meaningful part of your workforce that you perhaps are coming up on a wage discussions or renewal that we'll likely see a price increase that has not yet been built into your numbers or are you pretty much done from from overall wage repricing.
Type of framework.
Yes.
So while there most of the wage adjustments we spoke to in Q2 and have carried through in Q3 have really been in it.
Drivers technicians frontline employees, our recycling folks et cetera, So I'm, taking a swag here, but its probably two thirds to 70% of our folks that are in that population in some way shape or form and granted that's not to mention as I say that we've raised rates on every one of those employees, but we've been dressed.
That employee group and then the balance I mean listen I think everybody is in a competitive labor market right now, we're keeping a close eye on the other 30% to 35% who are and part of that initial push but that's something we do on a regular basis and we go through that at least annually to make sure that we are.
Compensating all folks adequately relative to what's going on in the market. Okay that makes a lot of sense I appreciate the time as always.
Welcome.
Your next question comes from the line of Michael Hoffman with Stifel.
Good morning.
2018 saw a lot of inflation for the first time the markets first time seeing garbage deal with inflation, how would you compare the piece of that.
Versus the pace of what you're experiencing right now.
And then let's remind everybody you covered all of that inflation with pricing eventually then too.
Yeah, I don't think there.
I don't think that that close I think this is this is far more acute than what we've seen I'm not sure there is anybody working.
At our company today, maybe it may be a couple of people in their seventy's that have seen this type of of rapid inflation. As the example, I gave of the customer they got the 4% price increase in May was a real examples. So we werent even seeing this in may that came on.
As quickly as almost the end of July.
But it really has accelerated and you weren't hearing people talking about it I mean, it's being talked about.
All the way up at the White house being talked about by the fed chair. So I would tell you that this is.
This is more acute than we've seen before but the other thing and you're right. Michael we did cover it with price and we think price is the primary lever to two to cover this and we're doing a good job with it but it's why I wanted to make sure. We stressed that there are there are some high turnover jobs that really don't have to do with this inflate.
Sherri period, there's some high turnover jobs that we need to we need to really seriously look at automating and at the same time using customer service digitalization to really extract Mac that maximum efficiency out of our organization, Jonathan I've talked a lot about it.
And we think when we fully automate these routes, there's somewhere between 10, and 15% efficiency improvement because youre not going to automate a truck driver job certainly in my career, maybe even in my lifetime, but we do think we've got significant opportunity there on the on the drivers side force for efficiency growth.
Okay fair enough, so clear messages and you've said this in pieces, but I want to say it out loud you expect to cover all of this inflation.
You just you just need time and time isn't years it's months.
I think that's right I mean, the 40% I think we should focus on the 40%.
That is index, driven and I talked about how half of that or 70% of what's happened in the first half of the year. There is a look back so the adjustment that comes in January for some of those some of those big contracts. Some of those have a 12 month look back which would capture the full effect of inflation. So we wouldnt get the full effect of this kind of.
Last three months of inflation on those adjustments.
We wouldn't get the full effect of that until the adjustment we take in January of 2023.
The adjustments that we taken July will pretty much reflect all of the inflationary this acute inflationary impact.
Okay fair enough Divina on the free cash flow what are your assumptions to maintain the guidance at two five to $2 six on cash flow from ops and capital spending.
So from a capital spending perspective, we would love to spend every bit of the full year guidance that we put forth at 1.78 to $1 eight $8 billion, but as I mentioned all year, we've seen things move just a little more slowly than we would have liked.
We have taken some proactive steps in order to pull some capital forward that being said right. Now we think we could finish the year somewhere in the range of one 7% one $8 billion, we'd love for it to be a higher number than that and particularly as we add more.
Investments in renewable energy and recycling specifically in terms of the other puts and takes I think it's important to recall that we expected an increase in our cash taxes on a year over year basis, we've seen that through the nine months, but you'll have another leg of that in Q4, and then we've seen.
Significant working capital contributions in the first nine months of the year, we think we'll get some of that back in.
In Q4, just based on some of the timing impacts thats been payments that we have but all in all really good performance in cash flow for the year I would say.
It is the one that has certainly exceeded my expectations in every single aspect.
<unk> contribution all in all total free cash flow at about the midpoint of Q five five its tremendous growth on.
On a year over year basis are meaningfully ahead as the 1965 that we normalize when you look at 2020 and for the impact of the proceeds from divestitures from the ABS transactions. So that shows the level of growth on a year over year basis and free cash flow.
Okay, but just some of your comments if you end up spending on the lower end of the Capex, there's an upward bias to the midpoint of the range on free cash flow.
The one thing I would caution there is on the cash flow from ops, we do have the taxes and working capital impacts that I mentioned, so that that's the only caveat that I would have there, but yes, okay and then John.
I saw <unk>.
Tim Hawkins and.
Jason Kraft and a couple others from other companies recently all of the Adobe or a meeting and they all suggested that peak open positions you had past peak open positions in your at least no longer struggling against peak open is that is that an accurate statement still so this pressure.
It has peaked and started to add a little bit.
I would tell you within Wm.
Mentioned in my prepared comments, we're probably last four or five months, Michael we really started to show some progress in terms of being able to net add if you will month in month out in some of those key position specifically.
The driver ranks, there's still a lot of competition out there and theres still a lot of pressure as Jim mentioned, you cant turn on the TV without finding.
Hearing about some form of pressure in transportation, whether its marine whether it's rail or whether it's a truck transportation, but as I mentioned the good news is I think the efforts we made to make some of those wage adjustments coupled with our efforts around retention and hiring are certainly yielding positive results here in the last four or five months.
Our off peak off peak open positions is a clear message.
Well, Michael I mean, do you think about I mean, we have.
But with 10% ish of our drivers that are making over 100000 a year.
And I don't know what the figure is for 90000 above but it's but it's.
But it's significantly higher than that so at the same time, we have we have really good benefits we've announced the.
Education benefits several months back.
So we chose to pay them during COVID-19, we've chosen to pay them.
Yes.
Still pay them when they're out on quarantine.
So we really are focused on taking care of our.
Our teammates here and we think that pays dividends for us in terms of reducing the amount of churn to John's point I think I think the number I heard last week.
Was there 82000 open trucking positions across the United States.
And then of course at the same time, we're seeing this volume increase and so we're trying to we're trying to compensate for that as well. It's a good thing it's a good problem to have but.
But yes, so to John's point, I mean, we're getting past that peak, but we think we're well positioned we like our position are fulfilling these roles is part of why we are we have really good pay and benefits and we hope to make.
Make sure that we differentiate ourselves there.
And then last one for me for John.
I picked up in your remarks do are seeing net new business growth.
Not just where you're opening leverage it's net new business growth and there's momentum that momentum should continue. So that's that's good news I guess.
There's two pieces to that.
How does that impact the thoughts about capital spending inflation be able to meet that business growth.
Well first I would tell you we were two things I mentioned in my prepared remarks, Michael which are pretty with familiar to you which is the service increases versus decreases as strong from Q2 to Q3, and then I mentioned also small and medium business, which is kind of the traditional collection business net of them say temporal off and kind of the big.
Real really large accounts, we're seeing good momentum there that was the 10% number but I don't see in terms of capital I mean, the capital spend there would be some incremental capital thing containers and.
To some extent when you as we've talked about before that step function between filling up a route in the next round, but we don't see that is out of the ordinary capital spend.
Terrific. Thank you very much.
Yeah.
Your next.
Question is from the line of Kevin Chiang with CIBC.
Good morning, everybody. Thanks for taking my question here.
If I can ask just on your repricing strategy for next year.
Just given how acute inflation as you've mentioned Jim I'm, just wondering how you look to maybe limit or do you have that lag between when you see pricing versus.
Maybe this view that inflation might be more persistent than we all had hoped a few months ago.
You'll get a contract term that might allow you to reprice in the event that inflation continues to persist.
Elevated level or.
Pricing for maybe what you think inflation could go versus maybe what what cost do you think you have seen increase in the back half of this year, just just be interesting to see.
How you think about that repricing strategy to kind of limit that lag as you look out into 2022.
Yes, Kevin I mean, the lag really just hits us in this in the first part where we're so there's kind of three months period. Once we catch up with that and once we catch up with these adjustments on the 40% that's indexed based.
Unless inflation runs up from here, which which we don't anticipate I'm not sure I've seen anybody that anticipates that then we feel like we're in a really good position with pricing to cover these costs increases plus add to margin now as inflation goes to 15% then that I will retract that statement, but.
But I don't think anybody expects that so so right now I mean, if you look at core price for example, I mean, we're pretty happy with the core price numbers that we were showing core price was six 1% for the quarter in commercial.
That's a big core price number.
If you look at at the landfill line of business, which has got a lot of questions over the last couple of years.
Core price in landfill.
Four 6%, that's two consecutive quarters over 4% of core price and really that's that's probably the best metric for looking at price increases is core price versus yield deal was very good as well.
Core price.
Probably is the best approximate or of price increases.
So I feel really comfortable with the existing kind of CPI and <unk>.
Core inflation in the system that the pricing mechanisms that we have in place will cover that and also provide us some opportunity to to improve margins as we go into 2022 keep in mind that that kind of 12 month look back a big piece of the adjustment that's coming in January won't include all of the inflation that's going.
Take a year to capture that.
That's great color and yeah, let's all hope not.
I think it was 15% of inflation there.
No.
Maybe I can ask a non inflation question.
The EPA recently put out this pea.
Fast with strategic roadmap I guess as it looks to evaluate.
What the studies and I guess things they looked at over the next few years just wondering.
If you look at the roadmap that you pay to put out there is there anything that you would comment on it does it align with what you thought the EPA would do or think the EPA should do as they as they are.
I guess to evaluate the pizza strategy.
Yeah, Kevin I was just something off the press here in the last week or two with some with some milestone dates at the EPA published on some things they want to get covered but I think our answer is still the same way that could present, a little bit of short term cost impact to us, but we still believe over the long term the post collection.
Assets, we have are going to benefit from that certainly over the long term.
Alright, I will leave it there. Thank you for taking my questions.
Okay.
Your next question is from the line of Sean Eastman with Keybanc capital markets.
Hi team thanks for taking my questions.
<unk>.
I'm just curious if you've seen any instances, where this labor shortage is causing a downtick in service quality.
You guys track that anything concerning there I just wonder if that ultimately.
Impacts wm's ability to continue this great pricing trend we've been seeing.
So Sean Yeah, Theres pockets of it I mean first and foremost we track it we track it everywhere every day and all of us get to keep a close eye on that and we have seen some pockets of pressure for sure where we've had some acute turnover issues, but as we mentioned and Michael to the response to Michael's question, we feel like we're past the peak and we're making.
They are to your second question is it isn't profound enough for us to have to concede anything on a pricing front no. We don't think so and I think if you look if you look at where a lot of the probably the most acute labor issue is for US is really around if you look at our residential and you look at our pricing what our pricing strategy has been and what our core pricing yield results were for the quarter end AUM.
The last number of quarters. It has not impacted us there or frankly in any other line of business.
Well I think I got in a churn.
Sean the churn is probably the the <unk>.
Best metric for us to gauge that.
And churn came in at eight 7% for the quarter. We look at the same quarter. Prior year was eight 8%. So we're not seeing an uptick in churn I think.
We're doing everything we can at the operating level, there's a lot of pressure on the operation when you have.
500 ish drivers out due to COVID-19 during the peak or when you when we've got all of these.
Hiring pressures.
What do you expect that theres going to be some pockets as John mentioned and we're doing everything we can to make sure all the way up to my level I mean, I get I get notes from customers, saying, Hey, My recycling was missed today and so.
Or that out to the right person to make sure that we picked them up but there have been some pressures, but we think that we're moving in the right direction and it certainly helps when you see that number of 900 employees out for coal would come down to 200 and that was a pressure that debt.
That was hard to compensate for them.
Okay. That's helpful and what about safety I mean, do we need to be kind of incrementally concerned about safety and the costs associated with safety issues around this labor dynamic what's the thought there Jim.
Well I should probably let John answer that but the answer would be we never compromise on safety safety is at the very top of our list.
And so we are extremely focused on being a safe organization, John anything to add to that though I would tell you that's where that's one spot where technology and to some extent automation are helping we're in the process of updating all the onboard equipment for our collection vehicles, our supervisory vehicles with regard to.
Being able to scan what's going on with behavioral issues that so we've got some artificial intelligence has been is about 70% through our entire collection fleet they'll have with things like following distance cell phone usage that kind of thing. So no I think if you look at our safety results, we've seen a little bit of pressure as we've integrated ats, but the core Wm business.
<unk> to perform well and we're well on our way to getting avs, the avs business totally tucked in there as well.
Part of why we saw a doubling.
Of our training hours because.
As we're hiring more folks we absolutely make sure that they get fully trained and so we saw that two X and our training hours. We think that number comes down as we are hiring fewer and fewer drivers and technicians.
Okay very interesting stuff thanks for the help guys.
Your next question is from the line of Noah Kaye with Oppenheimer.
Thanks for taking the question and frankly, I know I can do as a reminder, not to use my cellphone.
So I appreciate that guys.
B B.
So capex for fall and operations is something I'd be interested to learn a bit about.
Obviously, the commercial vehicle industry experiencing production constraints and that's impacting customer delivery.
Just wondering how is this impacting the cost structure I think you mentioned having to utilize some school with their vehicles.
But maybe you can talk to you a little bit about that.
It might be translate into elevated opex this year.
Sure.
I think the way that we think about that John mentioned, you know having to take some of the older vehicles.
The sideline so to speak and pull those into service we saw that most significantly in the industrial line of business and roll off.
That's where we were able to flex most significantly in 2020.
While we do see it on the operating expense side, you know our long term focus continues to be on optimizing our fleet strategy. So that we focus on.
Reducing the total cost of ownership of each vehicle, we've seen some pressure in terms of per unit costs on the fleet overall some of that general inflationary cost pressures, but some of that is that we're driving toward automation to the points that I've made earlier, particularly in the residential line of business.
While we have a more expensive unit on the street, we definitely see the benefits of that.
Lower operating expense, but from labor and efficiency.
So overall in the current quarter, that's a component.
The cost pressure that we saw but I.
I would say that that was certainly secondary to the wage pressures.
We experienced overall and we expect that to update as we get truck deliveries.
As an interesting point best through nine months, we had only gotten 70% of the track that we expected to get in 2021.
To date.
We think that when we get those trucks delivered you'll start to see some of those impacts reduced as well.
Yeah.
That's helpful. I guess on the flip side of that there's.
What I presume are industry wide.
Labor and other shortages to do construction work at our landfills for expansion, presumably that's going to be a source of upward pricing pressure at the landfill that you had 3% yield.
This quarter, but I assume you've got a pretty robust pricing outlook.
And Phil and this may be a contributing factor.
Yeah, I think I think Jim did a good job of kind of categorizing some of that too I think there's a few places steel cost container costs resin landfill line are those are all things that our supply chain team and their respective operating teams are keeping a close eye on and we may make a decision of fixed cam versus buy one while steel is up 200% or whatever the number is.
But thats not the bulk of it I think to Bina spoke to the majority of which is really a fleet spend some of the delays there coupled against strong volume. So that's why you're talking about some of the cost pressure being somewhat acute and us having confidence whether it's in a collection or the post collection side, including the transfer of subcontractor side that we're going to be able to recover that but one thing real quick.
I would caution against is matching the price increase that we got on third party volume at the landfill against what might be our cost increase there.
That doesn't and by the way just because we got.
Three 6% yield I think it was the number.
Let's say area, so 3.35% yield on MSW that does not imply that that's what our cost increase was at the landfill keep in mind a lot of the volume that comes out of landfill is our own volume, which gets priced at the curve which gets priced.
The street. So so our overall, we've talked a lot about our overall cost increase that includes cost increases that we're seeing at the landfills and I wouldn't I wouldn't necessarily.
I assume that just because we got three 5% on MSW that that means that landfill prices or costs are only going up by three 9%.
Appreciate that thanks, Tim and John.
Maybe just one quick one.
Any one time or a pull forward of spending programs.
But you're you're currently doing this year that could turn into a margin tailwind next year as you're lapping and know that customer service digitalization. That's been an investment focus but anything you would call out that sort of a margin tailwind next year that's controllable.
The only one that we've mentioned over the course of this year.
Higher and therefore, creating some margin compression in 2021 is our incentive compensation.
That being said I think everyone at Wm, we'd love to see it knocked it out of the park next year, such that that's not against that.
Each money too.
It's the one that I wouldn't call out there's not anything else.
Other than that.
The inflationary.
Lag that we've already discussed.
Perfect. Thanks, so much.
So texting and driving Noah.
You got it.
Yeah.
Your next question is from the line of David Manthey with Baird.
Yes. Thank you good morning.
Tagging on to that last question.
I believe in the past you've said about 15% of your labor and related benefits component of the cost stack is overtime.
You noted that was elevated this quarter could you give us an idea of how elevated it was relative to that long run average and then should we expect that to normalize into next year as COVID-19 settles out and hopefully you're getting from some of these labor issues.
Yes, David I think overtime was up about 6% for the quarter and yes, I do think that as we get some of these folks on board that we've talked about from our staffing efforts youre going to start to see as I mentioned on prepared remarks take the most expensive hour off the street right now because of some of the staffing challenges, but also because we've got volume in the collection lines of business.
Particularly commercial and industrial that really outpaced our expectations, we view that as a good problem to have long term in the short term, obviously, we're spending a little bit some premium dollars to get that volume collected so one quick clarification, because it's a great point, David and the 6% increase is actually on a sequential basis. When you look at that on a year over year.
Basis, it is meaningfully more pronounced so year over year, it's about a 30% increase in overtime hours.
That you saw in our costs in the current year.
Right Yeah. It was down significantly last year. So I guess it would have been up anyway right.
That's right up as well.
The tough year over year comp and you know.
We were already seeing some of that in the second quarter. So the sequential impact is meaningfully lower.
Okay. Thank you.
Yeah.
Just a dumb mechanical question here can you help me understand the mechanism by which higher recycled commodity prices drive your operating expenses higher.
Sure.
Operating expense table in the 10-Q, you'll see what we call our cost of goods solid line and that cost of goods sold line is where our rebates to our customers show up for the higher commodity prices. We also provided a table in the press release that shows the impact of that on margin in the current quarter that was.
140 basis points, so a very significant impact to the year over year comparison.
Makes sense, thanks, very much for that.
Okay. Thank you.
Thank you.
Your next question comes from the line of Jeff Silber with BMO capital markets.
Thanks, So much I know it's played I'll just ask one discontinuing the conversation about inflationary increases I'm just wondering from an M&A perspective are your sellers expectations also increasingly the either expecting higher multiples or are they talking about adjustments to adjusted EBITDA because of these higher costs.
Thanks.
Yes.
Yes, Jeff so.
I guess anecdotally, what I would say is we have heard.
That sellers are facing the same same problem that were facing which is and we've kind of call. It the great resignation and and so on.
A lot of them are saying I've had enough I'm going to go ahead and sell but I would I would tell you. This in terms of their expectations.
I can't control their expectations, what I can control is what I pay and I would much rather grow organically than pay a multiple of <unk>.
13, or 14 times, we're going to continue to be disciplined about that.
Okay, that's great to hear thanks, so much.
Your next question is from the line of Jerry Revich with Goldman Sachs.
Yeah.
Yes, hi, good morning.
Jim and.
Jim in your prepared remarks, you mentioned seven to 10 percentage points of price increase or a needed to cover the higher costs.
Can you talk about open market price increases that you folks are putting through October and into year end are you seeing that some of the 10% improvement at the yield line for your open market business based on price increases you're putting through now and what's up for renewal.
Now that said the 10% is more of a core price number I mean, that's that's the price increase that we're taking so.
In order to get down to yield you have rollbacks and then there's a mix component in the yield calculation, so youre not going to see 7% to 10% yield, but we do feel like with I mentioned that we've seen eight 7% labor inflation for the quarter. So in order to cover eight 7% labor inflation in.
Devine and John have talked a lot about the non labor inflation that we're seeing we do feel like we've got to take 7% to 10% price increases. So that's what that number is.
Okay.
I believe it was two quarters ago, maybe you mentioned that you're satisfied with the way the industry has price rationally. So far in this recovery has that continued and now that we're seeing this acute period of inflation.
Did I say that I, usually don't I, usually don't comment on the industry, because I can't do it I can't control the industry, but.
But I am satisfied with how we're doing.
And we do a nice job of looking at not only what our inflation is and this has been much more accelerated.
Accelerated than we anticipated, but also how do we how do we improve margins and then I think when you look at just about any metric. The one that we've that we've held out as being a real success story is residential.
With residential yield at 5% it wasn't that long ago that we were talking about residential yield and kind of the 1% range. So.
We feel good about all lines of business in terms of our own pricing and that's really the only place that I that I speak of is what WNS is doing.
Okay.
And then in terms of I know labor cost topic, you know obviously labor.
Availability is going to be low for the duration of this economic cycle. So.
You know what gives you comfort that we've reached the point of peak inflation from a training cost standpoint et cetera.
For availability.
B and escalating issue if we're having this conversation a year from now.
Well I think Jerry we've obviously got in front of the wage wage adjustments, we started down a couple of quarters ago.
Early in Q2.
That's certainly helped the other benefits we havent placed have certainly helped and I think we're tracking the job openings, obviously versus volume right and the good news is the volume is still strong that does put some pressure on the folks that we need to recruit but as I mentioned for the last four or five months, we're making headway in terms of what we have versus what we need even relative to that volume.
And I don't think we can overstate that I've talked about it a number of times, but lot of a lot of conversation about pricing today as being the.
Our primary lever, but I don't think we can overstate the importance of using automation to take some of the some of the labor intensity out of this business. It's a very labor intensive business. We have positions that have very high turnover that does not imply that we're going to come out with a big reduction that's not what I'm, saying I'm, saying, we can automate some of these roles.
And then use the attrition to our benefit.
I appreciate the discussion thanks.
Thanks, Eric.
Your next question is from the line of Michael Feniger with Bank of America.
Hey, guys. Thanks for squeezing me in I'll I'll keep it short just for for free cash flow conversion Davina. When we think about next year. So can you kind of just walk through the puts and takes obviously capex. This year is coming a low end for obvious reasons.
There might be some catch up next year, so maybe capex of sales higher than normal, but maybe you could walk through when we think about next year 2022, the working capital taxes anything you'd like to highlight as where we're thinking about 2022.
Yeah, It's a great question, Michael and my certainly already looking ahead into the <unk>.
Turning to outlook.
The strong conversion in 2021.
Step back from that and say if we're targeting a conversion of every EBITDA dollar churn free cash flow at 50%. We think that that's the outcome. That's representative of the long term trend for our business.
Had success, reducing our interest in hot Hot.
Doug you mentioned could be a question mark for the year ahead too early for us to say one way or the other although we are optimistic based on some of the conversations that are happening currently and the.
The progress that we've made on working capital management has been really strong that's one where I would tell you. It's too early for us to declare a victory were implementing new systems and processes and those are showing some value.
Certainly difficult to use that as a lift about that 50% target in terms of managing capex that really is the one that we're focused on because for us our capital dollar really should be looked at differently than M&A, Tyler and if we can get a better return on invested capital from accelerating.
And our recycling business, our renewable energy facilities, we're going to do that and so while we're going to look for opportunities to accelerate capital we're going to do so in the same prudent way that we always do from a capital allocation perspective, and look at long term maintenance capital versus what we will consider more of a.
Growth oriented our investment oriented capital decisions. So that's the one place that there could be an evolution in our discussion in 2022, but no specific outlook.
Outlook that we can provide at this point, we'll give you more color next quarter.
Okay.
That makes sense.
Mentioned 2022, I mean, when I when I look at the midpoint of your 2021 guide implies a margin of 28, 3% around there that's kind of a fourth straight year.
That being in that margin range now granted one of those years was was it a pandemic. So that's that's impressive and now we are contending with inflation. So I know this has been asked a couple of different ways, but do we think that the margin. The typical margin expansion. We see in this business you know.
50 bps or so is that more of like a 2023 story as we're kind of in this odd period of coming out of Covid and deal with some of these inflationary pressures.
But what's really interesting in that same three year period that you mentioned is the impact of recycling on our margin and I think if you stripped out of way.
I really consider the inflationary cost impact.
It impacts that we've already discussed you are seeing strong execution on the frontline.
And.
That 50 basis points of margin expansion. That's why we really wanted to add the color on commodity price impacts in the press release that hopefully you can take a look at that table, but I do think that when we look at the collection efficiency all of these training impact.
We've been really satisfied with the continued.
Frontline execution of the team and delivering margin expansion, though it is.
Covered.
We have positive expectations for 2022 at this point. So there is going to be some continued noise from the recycling part of the business.
Great. Thank you.
Thanks, Mike Thank you.
Yes.
And there are no further questions at this time I will turn the call over to Mr. Jim Fish, President and CEO.
Thanks, Erica well just to conclude thank you to again big Shout out to all of our 50000 folks for the for the great quarter.
Been a challenging year and a half challenging two years for everyone, but in particular for the for them who have been.
Providing essential service on the frontline since day one so thank you to them. Thank you to all of you for joining US. This morning, we look forward to talking to you through the quarter and early in next year. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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