Q4 2021 Waste Management Inc Earnings Call

[music].

Good day, and thank you for standing by and welcome to the Waste Management, Inc. At this time all participants are in a listen only mode.

After the speaker presentation, there will be 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'd now like to hand the conference over to your speaker today, Ed Egl, director of Investor Relations. Please go ahead.

Thank you.

Good morning, everyone and thank you for joining us for our fourth quarter 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 at Devina Rankin Executive Vice President and Chief Financial Officer. You'll hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update.

John will cover an operating overview and Devina will cover the details of the financials.

Before we get started, please note that we filed a Form 8-K this morning that includes the earnings press release. It is available on our website at www.wm.com.

The form 8-K, the press release and the schedules to the press release include important information.

During the call, you will hear forward-looking statements, which are based on current expectations projections or opinions about future periods.

All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release, and our filings with the SEC, including our most recent Form 10-K as updated by our subsequent Form 10-Q filings.

Joe will discuss our results in the areas of yield and volume, which otherwise stated are more specifically references to internal revenue growth or IRG from other volume.

During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization.

Any comparisons unless otherwise stated will be with the fourth 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, the tables, which can be.

Found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM. Eastern time today at 5 PM Eastern time on February 6th.

To hear a replay of the call over the Internet access the waste management website at www.wm.com to hear a telephonic replay of the call about 855-859-2056, and enter reservation code 4865157.

The sensitive information provided during today's call is occurring on February two 2022 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.

I'll turn the call over to Waste Management's President and CEO, Jim Fish.

Alright. Thanks, Ed and thank you all for joining us.

2021 was another very successful year at WM. Our strong operational and financial performance continued throughout 2021, delivering full-year results achieved or exceeded our financial guidance, which we increased from our original expectations twice during the year. We also successfully integrated the advanced disposal operations.

Generating synergies that have already exceeded our initial expectations with further synergies to come.

During 2021, we are focused on driving disciplined organic revenue growth advancing technology investments focused on customer retention and growth and cultivating our people first culture.

Execution on these priorities came together to produce record growth in full year, adjusted operating EBITDA and cash from operations.

It can't be overstated how impressive it is that we generated more than $5 billion of operating EBITDA in a year like 2021.

This robust operating EBITDA translated into all time high cash from operations of over $4 billion.

Which allowed us to return a record of $2.3 billion to our shareholders.

Contributing to our operating EBITDA was our pricing, where we finished 2021 on a very strong note.

As we made steady progress uncovering the cost inflation in our business with excellent core price results across all lines of business.

John will provide more details here, but we had record core price and both are landfill and residential businesses.

Two areas we've been particularly focused on over the last couple of years.

Strong core price translated into the best collection and disposal yield that we've seen in more than a decade.

Another great story about our pricing efforts is that we're still seeing strong volume growth and improvements in churn in 2021 churn of eight 4% is an all-time low.

As 2022 kicks off. We're fully focused on recovering inflationary cost increases through our pricing programs and through the aggressive management of our cost structure.

We're fully focused on recovering inflationary cost increases through our pricing programs and through the aggressive management of our cost structure.

Our revenue management team is hard at work executing on in 2022 pricing plans. So that we can recover the inflationary cost pressures in our business and deliver another successful year. In fact, we've recently seen several large customers who have historically been very price-sensitive renew at significant increases.

On the cost front, a big part of that management of our cost structure will be to materially improve our labor efficiency through the application of the technology investments we've made over the last 18 months.

Our expectation is to a trip between 5 and 7,000 positions over the next four years without replacement as these positions have become difficult to source and we expect that will continue to be the case.

At the same time, we continue to focus on providing the best workplace for our employees and leveraging our asset network for growth.

Regarding our 2022 financial outlook, Devina will provide more details, but at a high level, we expect to deliver total company revenue growth of approximately 6% driving operating EBITDA growth of approximately 7% in 2022.

It's fair to point out that both our revenue and our operating EBITDA guidance are at or above the high end of the range as we targeted for the long term at our Investor Day in 2019.

We expect margin expansion in the second half of the year with full year operating EBITDA margin is expected to be flat to up 40 basis points compared to 2021.

This sets us up for another year of robust cash generation.

The extraordinary cash generation of our business positions us to play in a 13% increase in our 2022 dividend.

While at the same time, making substantial increased investments in high return renewable energy and recycling projects.

Tara Hemmer was appointed as our Chief Sustainability Officer last summer and she is charting a path to an aggressive long term growth for our sustainability businesses.

In light of our very strong cash generation, we plan to invest approximately $275 million in 2022 to expand our network of renewable natural gas plants with incremental investments in 2023 through 2025 totaling approximately $550 million.

We expect to build 17 RMG plants over the next four years, which would grow our R&D generation by six times.

With conservative assumptions. These projects are expected to generate operating.

Annual operating EBITDA run-rate operating EBITDA of more than a $400 million by 2026.

And in today's higher prices that operating EBITDA more than doubled.

In recycling business.

We expect to invest $275 million in 2022 in mirth technology with incremental investments in 2023 through 2025 totaling approximately $525 million.

These investments accelerate our automation of recycling process processing to reduce costs and improve product quality as well as expand our single-stream recycling footprint. Together, these projects are expected to generate annual run-rate incremental operating EBITDA of approximately $180 million by 2026.

Assuming $125 per ton blended commodity price.

These growth projects further WM's sustainability leadership by increasing the renewable energy generated from our landfill network expanding single-stream recycling capacity and automating recycling processing to reduce cost and improve product quality.

They also are expected to generate excellent returns that are superior to those solid waste acquisitions. In closing, we delivered a fantastic year in 2021, overcoming the challenges the year presented. As we look ahead to 2022, we remain committed to advancing technology investments that differentiate us, automating our processes.

To reduce our cost to serve and leveraging our sustainability platform for growth. Our success would not have been possible without the best employees in the business. And I want to thank all 50,000 of our team members for their contributions.

I'll now turn the call over to John to discuss in more detail our operational results.

Thanks, Jim.

And good morning, everyone. Our team finished 2021 strong with fourth-quarter organic revenue growth in our collection and disposal business up 6.5%. Our fourth-quarter core price of 6.7% in the commercial line of business and 5.2% at our landfills clearly demonstrate continued discipline and pricing momentum the strong fourth-quarter pricing.

Results with a leading contributors to robust collection and disposal core price of 4.8% for the full year.

2021 yield was also strong at 3. 5% and reflects an improvement in rollbacks of almost 500 basis points as well as continued improvement in customer churn.

As we move into 2022, our revenue management teams are focused on continuing to recover inflationary cost increases improving residential profitability and remaining disciplined on disposal pricing.

With the strong momentum we have entering 2022, coupled with our team's continued diligence, we expect to deliver core price of more than 5.5% and yield approaching 4%.

Shifting to volumes. Fourth quarter collection and disposal volume grew 2.8%.

For the full year, our collection and disposal volumes grew 3% and service increases outpace service decreases nearly twofold.

Organic revenue.

Organic growth trends in the first few weeks of 2022 have been encouraging even at some parts of the US and Canada have seen spikes and omicron cases during January.

Commercial yards are tracking above 2021 levels and while industrial hauls are modestly below last year, we see that as mostly due to weather disruptions and a few areas across the country.

Overall, we expect 2022 collection in disposal volumes to grow about 2% with commercial collection and MSW landfill volumes as leading contributors.

Turning to operating costs. Adjusted operating expenses as a percentage of revenue increased 150 basis points year over year to 63% with commodity-driven impacts from recycling brokerage rebates and fuel totaling a 100 basis points and the remaining increase was related to higher labor costs and overtime increase due to the highest number of COVID-19 related.

Absences we have seen as well as some risk management costs.

During the fourth quarter, our teams remain focused on controlling operating costs. And while the impacts of inflation and a tight labor market continue to put pressure on our metrics. There are positive trends in the fourth-quarter results and position us well to deliver on our 2022 plant maintenance.

Maintenance expenses improved sequentially as our continued efforts to standardized maintenance processes, particularly in our ADS locations is reducing downtime and improving fleet availability. We also saw efficiency net of incremental training hours improving all lines of business. We expect these efficiency gains to continue in overtime hours to improve as our

Teams are taking intentional steps to improve retention and we see them making an impact as annualized driver turnover has improved every month since August.

We estimate that our focus on operating efficiencies and productivity helped to moderate the impact of inflationary cost pressure by about 60 basis points versus the third quarter.

So putting it all together, when you combine our pricing efforts with our progress on cost containment, we expect operating expenses as a percentage of revenue to improve by the second half of 2022.

Our collection and disposal business is well-positioned to deliver great results in 2022, and so are our recycling and renewable energy businesses.

As Jim discussed, our sustainability businesses are central to our growth strategy and we're pleased with the strong results, we're achieving in both the recycling and renewable energy businesses.

In recycling, each quarter of 2021 are the spot among our five most profitable quarters of all time, and we're anticipating an equally strong year in 2022.

Our current outlook for 2022 is based on an average blended commodity price of $125 per ton, which is modestly above current values of $115 per ton.

And similarly, renewable energy business delivered very strong 2021 results and is expected to match this earnings contribution in 2022 as two additional renewable natural gas plants come online.

We expect our fifth plant to be operational early in the second quarter and the six plant to be online by the end of the year. Our 2022 outlook is based on a rens price of about $3, which is slightly above our 2021 rate, but below current rent pricing.

Finally, our integration of advanced disposal continues to go smoothly as we marked the first anniversary of the acquisition at the end of October.

To date, we have combined virtually all of the acquired operations into our billing and operational systems. And was 36 millions of synergy captured during the fourth quarter. We exited 2021 on track to exceed our expectations for full run-rate cost and capital synergies of $150 million.

So in closing, I want to thank the entire WM team for their focus on safely and reliably servicing our customers. The team has done an exceptional job managing our operations and I know that this will continue in the year ahead.

I'll now turn the call over to Devina to discuss our 2021 financial results and 2022 financial outlook in further detail.

Thanks, John and good morning.

Our teams worked tirelessly this year to provide essential services to our customers and community and we're proud of the results we accomplished together.

2021 operating EBIT backgrounds at 16.5% was achieved by accelerating collection and disposal core price, capturing that's commercial collection and landfill volume growth successfully integrating [inaudible] business and delivering record-high recycling profitability.

<unk> record high recycling profitability.

Controlling our discretionary SG&A spending and leveraging technology investments to reduce the cost of our sales and back office functions also contributed to the strong EBITDA growth in 2021.

In the fourth quarter, SG&A was $481 million or 10.3% of revenue.

Our fourth quarter SG&A costs came in higher than our run rate due to the timing of some of our technology and sustainability-oriented investments.

2021 SG&A was 10% of revenue that's a 20 basis point improvement over 2020.

Over the long term, we target SG&A as a percentage of revenue a low 10%

So we're pleased to be nearing that target so quickly after the ADS acquisition.

In 2021, when we capture SG&A synergies from the acquisition ahead of schedule and starting to realize the benefits of our technology investments, particularly by optimizing our sales coverage model.

Growing our digital sales channel and streamlining the customer setup process.

We're confident that our technology investments will continue to deliver value as we differentiate WM and reduce our cost of therapy.

On the operating cost in SG&A line.

Fourth-quarter capital spending was $774 million, which is above the expectations we had last quarter as we weren't able to opportunistically accelerate investment in recycling and renewable energy at the end of the year.

While we continue to see supply chain constraints low delivery schedule and [inaudible] traditional solid waste asset categories.

Portland traditional.

We work diligently to close the year with strong momentum on capital investment to support growing volumes, particularly in our landfill line of business.

Growth in both cash flow from operations and free cash flow were particularly strong in 2021.

At $4.34 billion cash flow from operations increased 27.5% and when excluding the one time benefit from the required divestitures related to the ABS transaction, our free cash flow through our 28.5% in 2021 billion to $2.53 billion.

Over the course of the last year, we returned a record $2.32 billion to shareholders.

$970 million from dividend and we purchased $135 billion of our stock.

We accomplished all of this while achieving our targeted leverage ratio.

Of about [inaudible], demonstrating that we are well-positioned for future growth.

Moving to our 2022 financial outlook. As John mentioned.

We anticipate organic growth from our collection and disposal business of about 6%, which is the high end of our long term growth targets.

This revenue growth outlook drives our 2022 operating EBITDA guidance of $5.325 to $5.425 billion and that represents almost a 7% increase in operating EBITDA.

At the midpoint.

As Jim discussed, we are well-positioned to allocate our cash first to growing shareholder return and the increasing breadth of capital investments in our recycling and renewable energy business.

Setting aside the planned growth investment and focusing on the capital expenditures, we plan to invest in the normal course of business, we expect capital spending to be in the range of $1.95 billion to $2.05 billion in 2022.

Free cash flow, excluding the sustainability growth investment, is projected to be in the range of $2.6 to $2.7 billion.

We expect to make approximately $550 million of growth investments in recycling and renewable natural gas project in the coming year.

While these investments will be reported as a component of our capital expenditures and therefore, reduced our traditional measure of free cash flow. We see these investments to be similar to an acquisition dollar as they will contain high return growth as a strong complementary existing business.

Then considering these growth investments, free cash flow is expected to be between $2.05 and $2.15 billion in 2022.

Turning to you.

Its free cash flow outlook anticipates, an increase in cash interest and taxes of $75 million to $125 million.

And a modest improvement in working capital.

Our long-standing commitment to a strong balance sheet and consistent and disciplined allocation of our available cash toward growth and shareholder returns continue.

Our long-standing commitment to a strong balance sheet and consistent and disciplined allocation of our available cash toward growth and shareholder returns continue.

Yes.

Our 2020 priorities will be to invest in the business.

And by adding tuck in acquisitions with strong return and buy back shares.

Given the board of Directors' approval of a 13% increase in the 2022 dividend rate, we expect dividend payments to total about $1.075 billion in the year ahead.

Given the board of Directors' approval of a 13% increase in the 2022 dividend rate, we expect dividend payments to total about $1.075 billion in the year ahead.

We also expect to continue our share repurchase program in 2022 as the board recently provided authorization to repurchase up to $1.5 billion of our stock.

While our guidance does that specifically include acquisition growth, we will continue to be opportunistic in pursuing the right deals at the right price.

In closing, we are proud of what we achieved in 2021 and we're excited about the opportunities that lay ahead for 2022 and future years.

Our team is hard at work so that we can deliver on our commitments to our customers, communities.

The environment and shareholders.

With that, let's open the line for question.

Thank you, ma'am. 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. Please stand by while we compile the Q&A roster.

Okay.

Sure.

Again your first question comes from the line Noah Kaye from Oppenheimer. Your line is open.

Good morning, and thanks for taking the questions lots of places.

Fruitful for questions, but I guess we should start with the announcement around the increased investments in sustainability. And specifically, I'd like to understand how you're approaching the economics on a long term basis of these R&D investments.

It seems like there is an awful lot of upside and downside in topic, the economics fairly exposed to the prices of Rins and given the scale of the investment contemplating and having an exposure to the EBITDA.

Contemplating and having an exposure.

True.

EBITDA.

You know those resin prices. How are you thinking about.

Potentially derisking that over time. It does seem like there's a market for long term contracts in R&D. While that would significantly haircut.

Potentially the RNG EBITDA versus what you projected.

You'd be getting more certainty. So I guess at a high level, how should we be thinking about that? And how it impacts the predictability of earnings for the company?

I'll start with some comments about how we approach the volatility.

Then I'll turn things over to Jim so that he can cover the strategic overview with regard to how we're thinking about this portfolio.

In the renewable energy space, we currently and expect to continue manage the volatility by looking both

At the very short term market-driven prices and then long term there's attractive long term contracts that you mentioned so we participate on both ends of the spectrum. And I would say almost anywhere in between and we will continue to assess what's best in order to both reduce volatility, but then also.

Optimize the returns of the portfolio and what you can see outlined in the press release that we provided. We're really happy with 

The return profile and the payback period, when you see a three year payback period at the conservative level that we've assumed that indicates that even with the incremental volatility. We know the returns outpaced the solid waste acquisition returns that we've discussed.

Yes, I think just to add to that on the strategic side.

I think there really isn't, I guess I'll say it this way we have four critical capabilities that nobody else has that enabled us to really have confidence in these investments. Devina talked about how we mitigate risk, but as we think about them strategically we have a team that's been doing this since 2015.

There really isn't I guess I'll say it this way we have four critical capabilities that nobody else has that enabled us to really have confidence in these investments the bina talked about how we mitigate risk, but as we think about them strategically we have we have a team that's been doing this since 2015.

And they know how to scale these plants across the whole portfolio. We have an asset that nobody else has which is the amount of gas that we own.

Nobody else can bring that to the table.

We have the biggest CNG fleet in North America.

And that enables us to fully close the loop.

And leverage the fleet to monetize the R&G and then lastly, we've got the balance sheet. So if you look at all four of those this made a ton of sense for us to accelerate investments in 2022 out through 2025, I don't think anybody expects that that's over the next.

Three years that we're going to see significant downside.

And rinse pricing or for that matter natural gas pricing, but if there is we built in pretty conservative estimates and still come up with these very strong returns that Devina referenced.

And rinse pricing or for that matter natural gas pricing, but if there is we built in pretty conservative estimates and still come up with these very strong returns that Devina referenced.

That's very helpful. Thank you.

And then my second question is just around labor, really around people. You've talked.

For many years about really making waste management an employer of choice not just in the waste management industry, but amongst all companies.

And now that you're really embarking on a program of attrition in automation increased efficiency. I guess how do you approach the challenge at the same time remaining that employer of choice and continuing to make positions at waste management attractive to 

an increasingly constrained labor force.

I think you used the right word there, which is attrition I mean, we're not talking about.

Announcing a big layoff next week, we're talking about using high turnover. This hold great resignation as we've heard.

We've been talking about that for a while now.

And you've heard me talk about my daughter, saying in her high school class nobody wants to drive a trucker or are operated piece of that equipment. So this is not something that just came to us in the last in the last three months, we've been focused on it for a while we built out those three single-stream plants, which we've discussed at length.

And you've heard me talk about my daughter, saying in her high school class nobody wants to drive a trucker or are operated piece of that equipment. So this is not something that just came to us in the last in the last three months, we've been focused on it for a while we built out those three single-stream plants, which we've discussed at length.

And those have provided a significant labor benefit to us so as we started thinking about it more.

We saw other buckets of opportunity when we look at moving for example from traditional rear load we have.

Call it 3000 railroad trucks available to shift to ASL. And those re loaders, probably driven more by safety than anything else. So it's a safer vehicle than ASL, but there's a labor opportunity there.

And a category that's very difficult to fill particularly in today's world I mean, it's hard to get somebody to ride on the back of a truck and throw trash. So we've got some categories here, where we feel like we can really use attrition to our benefit become much more productive from a labor standpoint.

It's part of why I'm maybe never been more optimistic than I am today coming off of two pretty rough years, maybe as rough as any of us will see in our lifetime and all of a sudden looking at '22, where we can really start to leverage those investments. We've made in technology in those buckets, where we have.

Transactional type jobs that are really hard to fill.

I don't think this effects what we've tried to do with the culture. The culture is still absolutely being a great place to work.

We've done a tremendous amount with benefits.

Offering to pay for college education for dependence, which I don't think any other company out there does so we still feel very good about the fact that this is a great place to work, but where we have high turnover, let's take advantage of it.

Makes a lot of sense. Thanks, so much for the color.

Okay.

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Yes, hi, good morning, everyone.

Good morning.

Jim, I'm wondering if you could just expand on the I'll take part of the conversation you just had 22 million MMBtu of gas is going to come online. How much of that

I'm wondering if you could just expand on the I'll take part part of the conversation you just had 22 million Btu of gas is going to come online how much of that.

Do you anticipate going into transportation applications where it'll be eligible for rent three credits and you know how deep are your conversations with industrial gas customers that wouldn't be using three credits? Can you just talk about how that market is evolving?

And how deep that market might be at this point.

Might be giving me more credit here on a pretty technical question.

I guess I would tell you that I'm not going to give you a very technical answer because I just don't have the expertise.

And we can definitely get you an answer on that but if we look at the the one thing that I mentioned was our fleet and having that fleet. That's 70 over 70% of our routed fleet is now natural gas that number came down a bit when we bought ADS.

Yes.

But we continue to buy 90% of the trucks each year as natural gas trucks. So it does give us a chance to sell those credits.

And fully close the loop and also paints a nice sustainability picture for us that Tara in the entire WM team are able to leverage.

I'm not sure I can answer the more technical aspects of your question there, but hopefully, that gives you a little bit of insight.

Okay.

And then if we just talk about the yield outlook. So nice to see that acceleration for '22. I'm wondering can you talk about how you expect the cadence to play out. You know in the last call you spoke about bigger commercial.

And industrial price increases coming once we annualize so does that mean, we should look for.

Yield to accelerate as we had through the course of '22. So exit rate higher than 4% can you just put a finer point on how you expect that dynamic to play out.

I think if you look at the year over year comps the comps will certainly be easier purely from a price standpoint in Q1 and Q2.

And then we started just to kind of get our sea legs a little bit in Q3 and Q4 as we saw inflation.

I would tell you that that inflation.

That we started to see in Q3 did did catch I think the entire world off guard.

But we know what you expected coming into the year that we would have 40 year high inflation. So Q3 was playing a bit of catch up Q4, we started to really.

Catch up but there is a lag in terms of how much pricing.

We can get to cover inflation and honestly, we probably.

We'll be happy just to get to a point where we cover that cost.

That's why the labor aspect is so important because we're attempting to raise margins here and add EBITDA dollars. And I'm not sure we do that purely through pricing. In fact, I would argue that pricing we think can be.

The primary offset to inflation, but in terms of adding EBIT dollars and adding margin points. We think that the labor piece is a critical aspect of that.

To kind of talk about where it goes for the rest of the year, I would tell you that.

And I think John and I, both talked about it in our prepared remarks, but the fact that we are seeing landfill pricing and I gave an example of a couple of disposal customers that so pretty substantial price increases who previously had been very very 

Price sensitive and I think they told us that they understood. They are seeing inflation in their system and so we needed to take significant price increases on those on big landfill customers John talked about residential for a long time and we're finally, starting to see that residential is showing.

<unk>.

Vast improvements on the price front.

So I'm happy that we're seeing this across all lines of business that to me that is maybe the best sign in terms of pricing is that we're seeing this not just in the commercial line of business, but we're seeing it across all lines of business and all waste streams. 

I'm happy that we're seeing this across all lines of business that to me that is maybe the best sign in terms of pricing is that we're seeing this not just in the commercial line of business, but we're seeing it across all lines of business and all waste streams.

<unk>.

Our special waste.

If we look at our special waste and we looked at just our baseline.

We were up 7.9%. I think was in our in our base business pricing in special waste.

That doesn't really go into our yield number.

Because it tends to be event work, but that's a big increase. So we're happy with the progress we're making on price I don't know that that really spells out where we're going to be each quarter suffice it to say we're going to.

To have easier comps in Q1 and Q2, though.

I appreciate the discussion, thank you.

Your next question is from the line of Tyler Brown from Raymond James. Your line is open.

Hey, good morning.

Okay.

Hey, Devina. So it looks like margins fell about 140 basis points year over year here in Q4, any way that you could kind of unpack some of the moving pieces. I mean, I think ADS closed in late October as John mentioned, so that impacts seem to be maybe watered down a bit on a year over year basis, and I would think that commodities were a help.

Can you just talk about what was really working hard against you?

Yes, sure. So commodities have actually worked against us in the fourth quarter by 100 basis points, which is what John remarked to in his prepared remark. So that's the recycling brokerage part of our business as well as fuel.

And we expect that that doesn't tax would continue into the first half of 2022.

When I look at the remaining components of the fourth quarter. There were about 90 basis points of impact to margin in the quarter that represent it is as our run rate and so that's what gives us confidence in our outlet for the 28.1% to 28.5% EBITDA margin in the year ahead.

When I look at the remaining components of the fourth quarter. There were about 90 basis points of impact to margin in the quarter that represent it is as our run rate and so that's what gives us confidence in our outlet for the 28.1% to 28.5% EBITDA margin in the year ahead.

Go ahead.

Achieving 21% EBITDA margin in this year integrating the ADS business and having the significant cost inflation that we had in the second half, we're really pleased with and we know that.

1% EBITDA margin in this year integrating the NDS business and having the significant cost inflation that we had in the second half, we're really pleased with and we know that and we.

We have additional margin expansion opportunities, particularly with synergy realization that ramped in the back half of the year. So we'll see that continue into 2022, we had some incentive compensation.

Headwinds on a year over year basis.

Those actually on a year over year basis were more significant than we expect to see in the way.

Rollover benefit in 2022 that rollover benefit could be as much as 40 basis points next year. And so all in all what I would tell you with respect to margin, when we compare 

WM's margin industry margin, finishing this year at about 30% is a real accomplishment because that's a target that we've talked about for a long time and.

WM's margin industry margin, finishing this year at about 30% is a real accomplishment because that's a target that we've talked about for a long time and.

Using both recycling brokerage and the impact of accretion that our adjustment.

For the rest of the space, we came in at exactly 30% for the full year and 28.9% for the quarter.

I know that you asked. That's helpful.

I know you asked a margin question, but I have to say I guess time will tell whether investors are as optimistic as we are about this. But I got to tell you I mean, 2021 I mean I don't need to tell you what would it look like but.

At no point in our lives that we've seen in 2021 where we're having a hand to hand combat with a pandemic and at the same time seeing 40-year inflation and with that.

We still raised guidance twice. But for a couple of kind of one time or type expenses would've finished in the middle of the almost in the middle of the range for that that EBITDA guidance.

Kind of one time or type expenses would've finished in the middle of the almost in the middle of the range for that that EBITDA guidance.

I was actually stunned that we were able to work our way through 2021, and then when we look at 2022, looking at our guidance you remember the Investor day in 2019, and that's why we referenced it but putting guidance out there that's at the top end of that range by the way. If you remember that presentation, we had 3% to 4% inflation in that 2019.

That we that we were able to work our way through 2021, and then when we look at 2022 looking at our guidance you remember the Investor day in 2019, and that's why we referenced it but putting guidance out there that's at the top end of that range by the way. If you remember that presentation, we had 3% to 4% inflation in that 2019.

presentation, when we said that the range would be 5% to 7% for EBITDA long term range and we're coming out with guidance at 7%.

And that's also the baseline that we've raised twice in a kind of a crappy year in 2021.

That's why we're as optimistic as we are and we will see whether the market feels the same way.

Yeah, no, no, definitely strong.

But just going back to again kind of not to harp on margins, but you talked about them.

It sounded like you were maybe implying contraction in the first half and then expansion in the back. But just for modeling and so that we can kind of get the quarterly flow right. I mean should we think something like down 100 basis points in the first half and then up maybe more than that year on year in the back half or just any color there.

Yes Tyler.

If you look at the year over year comp Q2 at 2021 in particular is a really tough comparison because that quarter, we had 29.3% margin.

So what you outlined just now is exactly what our projections are, will be down about 100 basis points of margin on a year over year basis.

In the first half of 2022.

Up 100 basis points to 140 basis points in the back half of the year.

Right. Okay. So a great jumping-off point to '23. Okay and then just my last one here.

On the recycling side, Jim so the $800 million spend. How much of that is for automation versus new merck's? And to be clear. The 180 million EBITDA uplift. So 60 to 70 of that is from labor savings is that right and the other 120 to 130 years just from increased material flow.

Yes, it might be a little bit more on labor. I don't know, where we just had this meeting the other day, where we talked about how much of this is it's going to be new plans versus rebuilds. Both of them have really high payback really are really low payback periods really high returns. So they are both great investments.

The good thing is we're not really constrained

In terms of cash so we can probably it's less about either or and more about and.

We just want to make sure that we're as on those new markets. We're picking the right markets. I know Brent Bell and his team are looking closely at that.

And then with respect to the labor savings the number that we're giving.

As we've talked about is somewhere in the neighborhood of 1,000 to 200 positions over about a four year period. So if you kind of take the high end of that and you call it, I don't know let's say $75000 all in and keep in mind some of these or a lot of these are [terms.] So we get charged a different.

Number than they actually make. So let's say 75 gram all in, that may or may not be the right number, but you can use that kind of do the math and that's probably where most of these 5 to 7 are.

We're not talking about 200,000 dollar jobs here.

200000 dollar jobs here, but.

The high turnover, the high attrition that we see in those jobs really I think is makes this the absolute right move to move away from those.

Particularly in a time where we have such a hard time filling those positions.

Yeah, no, totally makes sense. I appreciate the time, thank you.

Okay.

Your next question comes from the line of Kevin Chiang from CIBC. Your line is open.

Thanks for taking my question, if I could just maybe ask.

The investments you're making in these.

These are all high growth areas, it looks like your renewable energy projects will generate roughly double the returns of recycling. So just wondering what are the gating factors that wouldn't have you accelerate investments in renewable over recycling if I just think of it.

Projects will generate roughly double the returns of recycling. So just wondering what are the gating factors that wouldn't have you accelerate investments in renewable over recycling if I just think of it.

of 1 dollar and one giving you doubled the return of the other.

Dollar and one giving you doubled the return of the other.

I think we've given a lot of thought to this and I think the cadence that we've laid out internally is the right one.

I think we mentioned 17 plants and that's a lot. So these things are complex.

There are some questions I guess around supply chain and how much does that lengthen.

Lengthen.

The amount of time that necessary to build up these plants.

The acceleration, we think is absolutely appropriate for all the reasons that we mentioned.

Do we accelerated further? I don't know that we do. I think we have the right amount of plants planned in the right places we've looked at where the right places would be, what landfills will be feeding them.

All of that.

I'm comfortable with the plan that we've laid out. And I think what's important is that the teams that are working on this are independent and not constrained by one another. So we're able to work on those things and in parallel and move to really important parts of our business forward.

Simultaneously and they each had great returns and returns greater than we're even seeing on some of our core solid waste acquisitions, which makes us really confident in making these investments at the same time. But I mean, adding $400 million in EBITDA and we've talked a lot about that is

For very conservative numbers, so 400 million in EBITDA for the existing plants plus those 17 new plants is a lot and that's why I mentioned in my remarks that if you extrapolate it out at today's natural gas and rens pricing, it's not $400 million north of 800 million.

So I think the amount of plants that we planned is appropriate.

Well, that's a fair point of view the returns across all these.

All these projects seem to be seem to be very high.

Maybe sticking on this topic, if I look at your free cash flow guide, including the spend just over 2 billion.

Devina, you talked about targeting just over $1 billion on dividends you did renew.

The buyback for up to $1.5 billion.

If I put that all together, does that suggest something about the M&A pipeline?

That maybe you're seeing either deceleration in opportunities or maybe the regulatory environment and the DOJ just make it tougher for you to maybe execute on deals of the timeline of those deals get pushed out.

Are there a deceleration in opportunities or maybe the regulatory environment and the Doj just make it tougher for you to maybe execute on deals of the timeline of those deals get pushed out.

Is that something that we should be reading into based on some of these investments you're making?

We should be reading into based on some of these investments you're making.

Yes, I would tell you that we're certainly not taking our eye off the ball or the amount of focus that we have as an organization away from core solid waste acquisitions in it and we're not seeing significant constraints with respect to.

DOJ pressure or anything like that outside of what we discussed when we were closing the ADS transaction. For us, you know, during the integration of ADS, that was the top priority for our organization, particularly in that in that part of the country and for us that was over half of that area.

That we oversee and so it was really important for us to make that priority number one from an M&A perspective. The team definitely looking at the landscape and participating in conversations as you see some of

The smaller players make decisions you know, we've always talked about the driving forces and their decisions in this tight labor market has certainly been an accelerant for them and they were part of this conversation is still focused on that and we are going to remain disciplined in terms of return.

We're buying at the right prices what will be important for us.

Thank you. I appreciate you taking my questions.

Okay.

Your next question comes from the line of Michael Hoffman from Stifel. Your line is open. Hey, Houston, hope things are good down there.

Can we go back to Rins for a second? Are you taking 100% ownership of the 17 or are you partnering?

At this point the plan is 100% ownership with a 17.

Fair enough and you can't do a financial hedge on Rins, yet maybe somebody will figure out how to create that but in lieu of that are there are other creative ways to develop or hedging approach to the.

The RIN because everybody's been alluding to are you trading one volatility for another having fixed recycling to this so what's the opportunity there.

Everybody's been alluding to are you trading one volatility for another having fixed recycling to this so what's the opportunity there.

The opportunity there really is on those long term contracts that I mentioned earlier and we continue to

Work very diligently in that space and have had some good success and we look for those long term contracts to be inappropriate balance to market exposure. So that we do have an appropriate level of volatility without giving up too much of the upside potential.

Work very diligently in that space and have had some good success and we look for those long term contracts to be inappropriate balance to market exposure. So that we do have an appropriate level of volatility without giving up too much of the upside potential.

For those long term contracts to be inappropriate balance to market exposure. So that we do have a couple.

an appropriate level of volatility without giving up too much of the upside potential.

How long is long?

Some of them have been more than 10 years of life.

Okay. Jim, what's your Washington DC staff telling you about EPA and the messaging they have around the RFS and the RVO? So it may cause that's the greatest point of volatility if they move that around wrong.

Jim What's your Washington D C staff, telling you about <unk>.

P E and the messaging they have around the RFS and the RVO. So it may cause that's the greatest point of volatility if they move that around wrong. It crushes.

It crushes the demand side.

And you can't control that so what are they telling you?

Yeah.

I think the good news is that they have their finger on the pulse up there. It's just the pulse seems to be a little bit erratic I guess.

Yeah.

I would tell you that.

There is like like CCR sending coal combustion residuals, which had been discussed within the EPA longer than some of the other items.

That is an area that we really see the opportunity starting to develop.

And we like the pipeline is kind of $40 million-ish tons over $1 billion for us for the next four years, and then things like [inaudible].

As we've always talked about that as an opportunity for ourselves.

But there's a lot that is being discussed.

I'm not sure we've seen that full consensus. Maybe is the best way to put it on a lot of those topics with the exception maybe of

Coal ash and some of those have been talked about longer. I think Michael the other thing we're watching small refinery exemption right. Because that's also been part of what's at market and there's been some commentary there and there is nothing decided yet but to the extent that that extended they extinguish some of the exemption there I think that obviously bodes well.

And the good news is in December EPA set our outlook for '22 and '23 that seem to recognize 

Don't compromise whatever you do with exemptions by studying [inaudible] to the numbers to us.

Uh huh.

That seems like a good signal for at least for the next two years.

If we could shift to price what's the early reaction to the five five average core price?

A year ago at this time the customer was taking more price we ended up with a better outlook on price with the current early reaction to the five five.

Well, I think probably the best indicator would be in our churn numbers. I mean, and I mentioned the churn was at an all-time low there. So I think.

The reaction is that people understand that inflation is real that it's out there in the economy.

And that we're being judicious about how we apply it.

Judicious about how we apply it.

But were attempting to recover our costs and look at that's been no easy to ask we've seen.

Pretty heavy hit from labor inflation, particularly in Q3 that started to come back down to earth a little bit in Q4.

Just simply because we've taken a lot of those adjustments already but I think, John, the number was almost $100 million in adjustments for 2021. Slightly over. So I think the reaction has been.

Reasonably accepting, Michael. I would add Michael to that.

Our most labor intensive line of business, Jim talk to the automation benefits and the path we're heading down with regard to residential. But you've seen a sequential improvement in residential core price and yield you've also seen some of the volume degradation. We're going to continue to be selective there, especially in this kind of labor environment, which we don't see a short term. So we look at that price and labor trade.

As good for the shareholders.

Okay. So if I then look at the volume side would you say, you're still seeing new business growth, helping that or is it still mostly service interval upgrades of existing.

Look at the volume side would you say, you're still seeing new business growth, helping that or is it still mostly service interval upgrades of existing.

I think it's some of both.

John talks a lot about service increases versus decreases. There is, I think it's almost like.

Service increases versus decreases there is I think it's almost like.

By a factor of two higher on service increases.

So it's a bit of both, Michael, I mean I mentioned.

Probably the most forward-looking volume that we have the revenue stream that we have would be in special waste and I think what that portends for the economy is that we don't see a big downturn in the economy coming even with the inflationary pressures.

Would be in special waste and <unk> and I think what that portends for the economy as a goods is that we don't see a big downturn in the economy coming even with the inflationary pressures.

Our special waste pipeline looks really good our special waste in Q4 was really strong.

So the only areas that we saw that were weak were really driven by difficult year over year comps. I mean roll off volume was flat. But it was not because it wasn't something for us to be concerned about simply because 2020, you had a lot of fire volume in northern California, and also a lot of.

You remember the late Hurricanes that hit the Gulf Coast last year, and so there was a lot of volume from that so without that.

We would've seen a much more positive number in roll off. So I think volume looks to be a bit of both of those still kind of an emergence from COVID-19.

And which is kind of the service increased service decreased piece, but also.

Growth of the overall economy.

Okay, and then to clarify the M&A question, how would you frame the corporate development pipeline? Is it busy? And then.

Is it a reasonable, you're not modeling this, but is it reasonable to think that you can participate in the ongoing consolidation at 1 or 2% Rev growth, which as you know a little less than the underlying organic growth of the industry?

Participate in the ongoing consolidation at one or 2% Rev growth, which as you know a little less than the underlying organic growth of the industry.

I think we will always focus on.

We'll always have our eye on M&A and where there is opportunities we will try and take advantage of those but at the same time, we don't want to overpay for these so we were careful there, but it doesn't look like the M&A.

Landscape. The landscape has changed that significantly.

But we just felt like as we looked at somewhat of a capital allocation.

Decision here with respect to these big incremental investments in renewable natural gas and in recycling. That the returns on those were better than the returns for solid waste acquisitions and while the cash generation of the business has been tremendous, it's not an infinite bucket, it's a finite bucket and so, therefore, we.

We feel like we will invest more heavily there, but again with M&A to the extent that that's an opportunity arises and we feel like it fills a gap.

We'll explore. And then, Michael, on a from a planning perspective. Our 2022 guide does not include any rollover benefit from M&A to solid waste acquisitions were only about $4 million.

In 2021, and divestitures actually had a larger impact. 

So from an outlook perspective, the '22 guide doesn't specifically contemplate anything from acquisition contribution. I mean, that's a great point Devina, because when I've talked to about that 7% EBITDA growth number at the high end of that long term range.

But that is almost 100% organic. I mean we're not talking about a big rollover from acquisitions.

We had very little in the way of acquisitions.

Solid waste type acquisitions in 2021, so that 7% is.

In the face of still pretty significant inflation, but it's at the high end of that range, which is why we're talking about it.

So you mentioned 2019 several times. The world's changed a lot since 2019. Do the assumptions need to be revisited?

<unk> needs to be revisited.

Well, we'll see I mean.

You might argue that the assumption that need to come down after the last two years.

But yes.

At Investor Day in 2019, we talked about what the world have been for the last three or four years, four-five years, even and which was pretty low inflation. So we build low inflation into those EBITDA and revenue ranges.

We may decide after 2022 or 2023 that the world has changed sufficiently enough to have another investor day.

To talk about different ranges.

Okay. Last one from me. John, you've been focused diligently for a couple of years now improving the resi margins. What's left? Is there much left or have you pretty much done that and now it's just maintaining it?

We're not done, Michael. I mean, I think when you think about this labor environment right from where we started to where we already talked about the world changing a lot. Well, labor world has changed a good bit. We've talked about that in our prepared remarks, and a bunch of the question and answer period. So I would tell you that the goal line there has moved a little bit. The rate the labor intensity of that business is higher than the others.

We still have automation opportunities there and the margins they are still not competing with commercial and industrial. So as much as we've made terrific progress, we have seen some additional pressure, especially in the back half of the year on wages inflation. If you think about the impact of the omicron in Q4, I mean all of those things.

I think we still have a good bit of opportunity there. Alright, great. Thank you for taking the questions.

It's Michael.

Your next question is from Kyle White from Deutsche Bank. Your line is open.

Hey, good morning. Thanks for taking the question. I wanted to go back on you talked a little bit about in terms of the special waste pipeline, but just wanted to take a step back and talk more broadly about the economy at a high level. What you guys have seen obviously a lot going on with the market, but housing is doing well, while maybe consumer sentiment and spending is weakening maybe just any notable details that you'd point to a high-level impact.

Your business given that you have exposure throughout the broader economy.

So I think the challenges that we're looking at in 2022 are largely going to be inflation and maybe to a lesser degree, this labor challenge that it feels like a long term challenge and hence.

The need to really become more productive from a labor standpoint, and the 500 to 7000 physicians that they will have turned away from the business that we plan to replace with technology by the way, but what I didn't mention is we saw some of that in 2021, we've talked a lot about these investments we've made in customer service digitalization.

And so in 2021. As maybe somewhat of a test case, we fully automated our customer set of functions.

Maybe somewhat of a test case, we fully automated our customer set of functions.

It was not a huge number of jobs. It was maybe two other jobs, so about $7 million in savings, we did something similar with

Some of our we call it sales optimization. So we've gone through a piece of it and then, of course, some of what we saw with recycling we've gone through a piece of it but I would tell you that in general.

We see and we hope to see 2020 to be a much quieter year than the last two. Hard to be noisier than the last two I guess.

Yes, we'll see time will tell.

In terms of the rise of omicron late in the quarter and into January did you see any impact on your volumes from this? I think in the prepared remarks, you mentioned, maybe I think Canada I know, it's a small exposure, but just any impact from the rise of omicron.

Yes. It was really spotty I mean, it wasn't it was more of an impact on our overtime.

It was it was really spotty I mean, it wasn't it was more of an impact on our overtime.

And our ability to service our customers that we are a few pockets you referenced Canada, where it's been a little bit of a unique circumstance up there in eastern Canada. A little bit of volume impact there, but generally speaking, no. We did see, we talked about the fact that we had as many I think the number we gave was 800.

Employees in Q3 at the peak who were out with either the virus or some exposure and so, therefore, they were quarantined. So 800 out of 50,000.

Employees in Q3 at the peak who were out with either the virus or some exposure and so, therefore, they were quarantined. So 800 out of 50,000.

Omicron, fortunately, it seemed less serious but definitely more contagious and so and that showed up in our numbers. The peak was 1,500.

Fortunately it seemed less serious but definitely more contagious and so and that showed up in our numbers. The peak was 1500.

And probably jobs half of those were drivers.

More than half. So if there was any good news about it was that it happened and it kind of December, January which are slow volume months for us. As opposed to the peak from Delta, which was in August and early September and those are peak months for us in terms of volume.

But right now we're seeing those numbers come back down pretty dramatically.

Got it. I appreciate all the details.

Yeah.

Your next question is from the line of Hamzah Missouri from Jefferies. Your line is open.

Good morning. Thank you. My first question and I know you touched on.

You know the margin side.

But I just had a follow up on just the operating leverage you know as you had said right.

You hit 30% margins, but basically, margin expansion still seems pretty low relative to you know high single-digit organic growth.

Could you maybe just talk about.

And I understand labor inflation et cetera.

You have been more aggressive on pricing earlier.

On the discretionary side I know the CPI side sort of resets.

You know kind of first half second half. So that's kind of 0.1 and then second point is your labor turnover higher than your peers because it seems like your peers are getting margin expansion on similar organic revenue growth.

So I'm just curious whether you know you could have been more aggressive on price earlier or whether you know your turnover is higher I know you're a much larger company.

Okay.

I'll start on the margin commentary.

Pricing I think with respect to our pricing activities what you saw.

Was.

A much more significant and a huge change.

Change in the cost environment in the third quarter.

Across the U S economy right.

There are not our competitors saw those impact.

I observed their third quarter results as well and and so what I would tell you is that what we saw is that we were taking active steps with our employee base to be sure that we were curbing the impact.

Turnover that were happening across the economy from a margin perspective.

I definitely don't think that you should take away from our 2020 results any indication of a plant.

Instead, what we know happened in 2021 is two things one we were integrating the avs business, which had a 400 basis points.

Lower margin base, then the Wm business and so we knew that would have pressure on our margins coming into the year and then secondarily, we saw that acute labor inflation cost hit us in the third quarter with a very prompt response.

Really late in Q3 early in Q4 from a pricing perspective that you provide really good margins hover in the fourth quarter to the point earlier that provided about 60 basis points, both from a price perspective and efficiency perspective.

Benefit on a sequential basis going from Q3 to Q4, and we think some of that sequential improvement continues into Q1.

Where our pricing activities will continue as we've mentioned.

I was just going to say, so I think it'd be hard to.

You made a comment earlier about how we'll see that margin improvement kind of in the back half of the year, but if you assume that we are seeing some margin pressure in the first half and you can do the math to get to the second half of the year I think it really gives you a certain level tells you about our level of confidence about what's going to happen with margin I think on your CPI point I mean, we think about two 5% is what we're going to see for the phone.

Your next year and as Jim mentioned earlier some of that a good chunk of that comes is.

In our residential.

Our revenue line and we see that the biggest lift for residential in July as far as turnover I can't comment on the others. What I can tell you is we've had a very concerted effort in process that we've put in place. We are pleased with what we're seeing it's obviously not a trend you fix overnight, but since August we've seen improving acquisition.

And retention numbers. So when you look at on a net basis, we are making headway in terms of those we're bringing on and those were retaining I.

I think I mean, how does the real quick first of all with respect to turnover I don't know what the other guys turnover is high it's I can't really compare.

I would tell you if they're not seeing any inflation on their business than they are operating in Antarctica because.

The whole world is seeing inflation and regarding pricing.

The.

Our core price of five 2% for Q4.

And you.

You might say well you guys aren't very good at covering inflation goes in place was more like 6% for us and we were only showing five 2% core price, we're not getting there, but as we've talked about there is there is a lag could we have been more aggressive I don't know what this thing came out of nowhere I don't think anybody expected it so.

I'm happy with the progress, we're making we've made a ton of progress sequentially between Q3, and Q4, and we will continue to see that in 2022.

Got it very helpful and my follow up question is on the investments more specifically you know around execution risk.

You have the 17 RMG plants I think you said youre going to take 100% ownership do you have the bench strength and engineering talent to sort of execute on that I'm. Assuming you are not you know JV partnering on this.

You mentioned, a bunch of accelerated recycling and automation investments too.

Again, you know great Paybacks, and you mentioned the EBITDA.

Ramp, but just help us think through execution risk I know historically.

Jim When you were CFO Wm had made a ton of investment.

I guess this was a long time ago right waste to energy ethanol plants oilfield than the company sort of refocus back to the core and now this is sort of a new phase of investment, but it is definitely very much sort of in your core wheelhouse.

You know RMG recycling et cetera, but just help us think through execution risk you know as you execute on all of these different initiatives going forward.

So hamzah I'll start with recycling I mean, if you look at where recycling Russ 345 years ago, we charted a path to make that business coming from an investment return standpoint, with other lines of business and even when the commodity challenge even when you look at commodities were down we were improving the returns on the margin on that business. So and then if you look forward I don't I don't think we'd have.

We have total confidence in our ability to execute on the recycling side I think we've demonstrated that even when commodity prices were not the tailwind. They were with this fee for service model. We've we've talked about so I think we've got backstops on the recycling side in terms of the team we have in place to be able to build and operate these recycling plants, where the biggest recycler in North America and we do believe we do this better.

And everybody else on the <unk> side, I think what Jim said and right now, we're assuming 100% of the risk we've got Optionality and Dominion talk to some of the other backstops, we could potentially put in place down the road in terms of the commodity risk in terms of the execution. Jim mentioned, we have the fleet and we have a team that's been that's been in the <unk> business for a bunch of years right now.

So to me this is less about execution risk, it's really just about given Tara and that team the resources they need to go faster.

There's been no shortage of potential suitors hamzah on the R&D business for us, but at this point, we feel we feel good about doing it on our own but we have.

We'll have optionality.

Got it.

And by Optionality do you mean that.

You you could potentially bring in somebody cause is that what you mean.

If we wanted sure I mean, I mean, one of the assets that I talked about one of the four things we bring to the table is as you know the asset itself. I mean, we have more landfill gas than anybody else and so those four things I think are really what differentiates us in this and this.

Foray into R&D that we think is going to be hugely valuable for us. So we talked about $400 million at very conservative numbers could.

It could be as high as 800 or more so we like our position, but yes. That's the answer is that optionality means.

If we wanted to partner up with somebody we could.

Got it got it thank you so much.

Your next question is from the line of Wolters, Brooklyn from RBC capital markets. Your line is open yes. Thanks.

Very much good morning, everyone. So you like in the growth initiatives to two acquisitions and <unk>.

And also kind of framed it as growth in my question. I guess is is on how much and I'm going to use the word cannibalization, but it's probably not.

Not the right word for it but how much to the extent that you might have invested in either growth capex over the next four years or your investment in acquisitions over the next four years.

Have come from or have been impacted by your decision to deploy capital in these areas.

Where are they at all affected or is this something that is completely 100% incremental and therefore.

Capital that.

They would have gone back to.

Investor returns as no because of the return potential.

Being allocated to this is it complete in other words do we open our models or long term barrels that we add that that EBITDA dollar the complete level of dollar EBITDA to our year for those years those out years or is this something that might have been also built into what we would have otherwise.

Our modeled in terms of M&A and or growth Capex.

Yes, so the easy answer here is that it's not a tradeoff for us. So this is not taking the place of some other investment that we otherwise would've crested in the way of growth or M&A for us. This is incremental and for that reason in terms of how you think about it in <unk>.

At our long term growth outlook.

This is incremental to that long term growth outlook that we've outlined.

Okay. That's that's fantastic I appreciate that.

On the customer.

Pricing and the impact on customer churn.

Every day seems to be a new day in terms of how what the level of pricing is that's passed on.

My question is is there any incremental change even as of.

As we enter the new year.

Go back to those customers with the price increases as fluid as it seems to be that all sectors and all services in all goods.

Any factors seem to be able to pass on price is there.

Any level of churn that is coming a little more than expected is there any behavior. Among your competitors that shifting at all again, not so much in the fourth quarter, but but but in recent trends that would.

That would that would suggest that the customer churn, maybe picking up a little bit here with the higher pricing.

I would tell you Walter as you look at our momentum into Q3, and Q4 and what we see on the outlook here and we've talked about for 2022 and believe me I asked that exact question of our revenue management team about once a week.

And the short answer is no I think the receptivity of.

Just about all of our customers to understand that inflation is real that it's not going away.

And we're trying to be thoughtful about it one of the comments I didn't make to Hamzah. <unk> question was really trying to take our customer lifetime value view of our base and then obviously we have is divina said some acute inflationary headwinds that took everybody a tad off guard and while we're doing our best to recover that as quickly as we can we're also this is also the long game too and I.

Think that's when we're when we're going through the model and customer lifetime value is certainly something we're factoring in there and I think youre going to see that continued momentum throughout 'twenty. Two I don't think from a we I havent seen other than what I commented on it some of the selective revenue decisions, we're making are residential the receptivity of the customer base has been pretty consistent.

I think also Walter.

Worth mentioning here.

Honestly can say I have no idea what the competition is doing other than what they've publicly talk about on their calls so it's not something we really pay attention to we have a certain cost structure that we're trying to cover.

And so that's how we focus our pricing yeah. Mike My question on competition is at the ground level are you seeing competitors.

Taking taking customers with a little less price then you're bringing on the table, but it sounds like that's not the answer I really appreciate the yeah. Go ahead, yeah. It's always it's always a competitive business. So I mean.

Are there are they are there competitors out there that that's our taking customers. It's a very competitive business, we have with cities, where we have.

It doesn't competitors or more.

So I think the answer to that is yes, that's just part of what we deal with day in and day out.

I don't.

I don't really focus on it because I feel like we are we have a really solid robust plan in place with respect to all of these financial aspects and pricing is a big contributor.

Okay, you've been very clear and direct with your answers I really appreciate it. Thank you for the time.

Our principles.

Yeah.

Your next question is from the line of Sean Eastman from Keybanc capital markets. Your line is open.

Hi team Thanks for fitting me in.

So you guys have said previously sort of that 50% free cash flow conversion as a sustainable level. It looks like you're guiding to close to that in 'twenty to 'twenty two when you back out the accelerated investments so.

I'm just trying to think longer term you know going into 2023 do we think about 50.

50% underlying conversion and then maybe assume.

Sustainability investments remain elevated.

Any kind of color on where that 550 goes in and that underlying sustainable conversion rate would be helpful.

Yes on that 50% target remains our call and we were happy to accomplish that in spring 'twenty, one and you're right from a guidance perspective, we're kind of right at the bottom end of that targeted range.

When I look at the longer term outlook, you're exactly right from a sustainability project perspective with the outlook. We gave for 2023 through 2025 and you can expect that that elevated level of growth investment will continue through that period.

And that would be.

<unk> treated similarly to how we provided our guidance in 2022.

When I look at the contributing factors, we think that there's more work that we can do on working capital optimization.

Job growth continues to be that long term outlook of 5% to 7% that we've talked about though we'll certainly continue to revisit that as as we see different factors contribute to the the headwinds and tailwind that the business is appropriate.

One I can't really comment on B has it remains a big question, Mark and we can't predict it is the future of cash taxes and whether it be.

The corporate tax rate or look at bonus depreciation impact.

Those things could put some downward pressure.

And that's just too hard for me to predict but.

With regard to the things that we can control we're going to continue working to not just have that 50% benchmark that try and improve that from here, but it also depends too right.

The free cash flow, obviously is a piece of it is one of the two numbers there and if you look at our free cash flow excluding those those growth types of investments than your than your ratio is right at 50%. If you. If you look at it the way we define it which is pulling capex out and this is this is as.

We've talked a lot about today those those growth investments in R&D and recycling.

We are essentially kind of making a capital allocation decision and spinning extra capex. So so that the the free cash flow guidance that we're giving is technically in that $2 billion ish.

Or.

Little bit more than that range.

If you use that number to calculate.

You know the ratio then it's then it ends up being under 50%. If you use that free cash flow number that we typically would would report as a range of $2 60 to $2. Seven then you were talking about something that's 50%. So there is a little bit of math and that that's that needs to be understood.

Yep, Okay, great quick clarification, there and just shifting over to the technology investments just in the context of Wm.

Are there levers to combat cost inflation beyond the pricing programs, obviously, you've talked a lot about automation, we've got the back office efficiencies.

How is that reflected in the 2022 margin guidance and.

I guess I'm trying to just think about the juice you guys have there going into 2023.

Yes, I think Sean I think Jim we all spoke to I mean, it's about making the labor pool that we have more efficient right.

Using technology to replace some of these transactional jobs and frankly, we're having a hard time filling but thats more of the operating side. If you look at it from a revenue side and we've talked a lot about the technology. We've installed in our operations in one of those is the technology, we've put on trucks and if you look at the <unk>.

Service increases and decreasing some of the revenue growth we're seeing in commercial in particular, we think technologies part of the reason that's happening we've automated a lot of those processes, where the folks behind that we all don't have to worry about whether the whether they have to take a picture send that picture and that's all done with the technology and data and analytics team we have so.

Just the operating side. We are also seeing with the investments we've made in what we call Smart truck as one example sales coverage optimization, which is really about getting more efficiency out of our sales force, which I think is also contributing those are a couple of examples where that technology is actually helping directly on the on the top line in terms of the margin juice.

Yeah, I would tell you when we look at margins in one place in the business that we specifically C technologies showing up other than what John has already mentioned, particularly on the topline is on the SG&A side and our SG&A margin are 2022 are expected to be a lot of the 10% that we had.

<unk> in the current year. So sure one last thing here and I know, we're a little bit of a long winded answer here, but <unk>.

To John's point, he talks about our data and analytics. So our team our data and analytics team is in the process.

Fully optimizing there they're working on a specific line of business. So fully optimizing the roll off line of business and the number of permutations that theres a massive amount of data. They built an engine there and now they are in the process of kind of rolling this out over a period of months, but but it will fully fully optimize.

Ultimately all collection lines of business right now, we're working on rollout, but imagine all the data that goes into this it's got road information. It's got driver data. It's got traffic, it's got customer data containers, all kinds of stuff the number of.

Calculations is a ridiculous number it's got like 17 zeros behind it. So it's a ridiculous number but what it does for US is get to a point, where we can fully fully optimize these lines of business and then you start talking about it the way maybe an Amazon talks about it.

Probably nobody else with respect to optimizing these routes, we think theres a huge productivity pick up there. So what we haven't talked about are some of the driver turnover that we'd love to be able to take advantage of and this is one of those avenues.

Yeah interesting stuff, thanks, guys I'll turn it over.

Yeah.

Your next question is from David Manthey from Baird. Your line is open.

Thank you good morning Hugh.

Covered a lot here.

Just a question on recycling automation investments what percentage of your recycling volumes are processed by your single stream facilities today.

And then what could that be by 2025.

Just if I could understand do these investments include adding more facilities or are they just about expanding capacity and improving productivity of the existing 49.

So we'll get you the information.

There will be sure to circle back with you in terms of the percentage of our tonnage covered by this time upstream network sorry, we don't have that at our fingertips.

With regard to the investments that we're making it more heavily weighted toward automation, but we will be exploring new markets and <unk>.

Expanding our Gulfstream footprint into markets that we don't currently.

Some of the new market investments as we heard the other day in our internal meeting was that it.

It might be a city, where where we don't have a presence, but we do have a presence in a city.

<unk> hundred 50 miles away and we feel like the better of the two would be actually too.

Go to the city to the <unk>.

South and closed out of a facility in the city to the north so theres a bit of a strategic decision there too it's not always just where do we have underserved markets and how do we add capacity.

I appreciate your time thank you.

Thanks.

Your next question is from the line of Michael Feniger from Bank of America.

Yeah.

Hey, guys, Yeah, I know, it's been it's been long so I'll just ask a quick one when we think of your core price of $5 five and yield of 4% to 22. That's very strong can you just help us what's embedded for the cost inflation.

2022, Jim in Q2 gave us great color around the acute inflation you mentioned I believe it was like 7% on some lines of business I'm, just curious what that should look like year over year as we think of 2022 versus 2021.

The 4% to 5% inflation is what we built in Michael So.

And that's why we think that we do get to a point, where we're able to cover that with pricing and then a lot of the margin growth comes from places like automation and removing some of these transactional type position.

Got it and just lastly, Jim just on the CPI side.

It depends on when you look at CPI, because you can get half of the year of the Covid type of CPI, while the other half of it is really high inflation CPI print. So I guess, just when I think about CPI running through your book of business is it mostly really second half.

Second half or even like a 2020 threes almost cvs like really robust CPI prints kind of come through the system.

The timing on that thank.

Thank you nailed it there Michael it really is.

Probably second half of 'twenty, two because a lot of these as we've discussed a lot of these contracts.

Adjustments seven to 12 month look back so it won't fully capture this.

That's a pretty aggressive ramp up in inflation until we get to July or even January of next year. As you may recall that we talked about almost 70% of the adjustments that we take happened in the front half of the year and so the ones that we just took in January .

I forget what the exact percentages are but the big two months.

For adjustments are January and July and what we just spoke of January to the extent that there is a 12 month look back it's not going to include a whole lot of it's going to include maybe three months of the big inflation ramp next year. It will include 12 months and as soon we.

You get into the deeper we get into the year with these adjustments the more they will include just big adjust a big ramp up in <unk>.

Perfect. Thanks, guys.

Thank you Mike.

There are no questions over the phone I will now turn the call over to President and CEO Jim fish.

Alright, well, thank you long long call today, but I think hopefully you felt we gave some good details. Thank you all for joining US we're very excited about finally coming into a year, where it feels like we're going to have a bit quieter year.

And so thank you all for joining us and we look forward to seeing you out on the road.

This concludes today's conference call. Thank you for participating you may now disconnect.

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