Q1 2022 Waste Management Inc Earnings Call
Good day and thank you for standing by welcome to the W. In first quarter 2022 earnings conference call. At 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.
The session you will need to press star one on your telephone and 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 your Speaker today, David <unk> Senior director of Investor Relations. Please go ahead.
Thank you Laurie.
Morning, everyone and thank you for joining us for our first quarter of 2020 earnings Conference call with me. This morning are Jim Fish, President and Chief Executive Officer, John Morris Executive Vice President and Chief operating Officer, and Davita, 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 Vito will cover the details of the financials.
Before we get started please note that we have filed a form 8-K. This morning that includes the earnings press release is available on our website at Www Wm Dot com.
The form 8-K, the press release and are scheduled to the press release include important information.
During the call you'll give 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 .
Rob will discuss our results in the 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 Jonathan Davita will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons unless otherwise stated will be with the first quarter of 2021 net income EPS operating EBITDA and margin 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 Wm com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures to 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 May 10 to hear a replay of the call over the Internet access the Wm website at Www Dot Wm Dot com.
Jeremy a telephonic replay of the call dial 85585920 by six.
Reservation code 33651 $5 seven.
Sensitive information provided during today's call, which is occurring on April 26, 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 express written consent of Wm is prohibited now I'll turn the call over to Ws, President and CEO Jim fish.
Thanks, Ed and thank you all for joining us.
The first quarter of every year sets the tone for the rest of the year and our strong first quarter results really set us up for success in 2022.
We delivered exceptional core price and yield results grew profitable volumes and managed our costs.
Salt with double digit growth in revenue operating EBITDA and cash from operations in fact, our cash from operations was the highest we've ever generated in a quarter.
Allowing us to return half a billion dollars of cash to our shareholders.
Our operating EBITDA margin of 27, 6%.
Head of our plan, even in the face of record inflation and the delayed approval of the alternative fuel tax credits.
So we executed extremely well in the first quarter and achieved better results than we anticipated positioning 2022 to be another great year for WMC.
In addition to the strong start in the first quarter, we see signs that the economy is trending positively.
Several of the key leading performance indicators within our business such as special waste volumes construction and demolition volumes and new business formation, pointing to continued strong economic economic activity.
And business performance for the balance of the year.
The positive economic activity combined with WNS diverse customer base.
The recession resilient nature of our business and nearly 75% of our revenue that is annuity like gives us confidence to reaffirm our full year outlook, we provided in February .
As we progressed through the year, we remain committed to executing on our strategic priorities are providing the best workplace advancing technology and automation that differentiate SWM and reduces costs and leveraging our sustainability platform for growth.
Turning to our sustainability and technology investments.
We're excited about our future we see the opportunity to further our sustainability leadership by expanding recycling capacity automating recycling processing and increasing the renewable energy generated from our Alaska network.
We opened a new recycling facility in the first quarter and we're on track to bring online another fully retrofitted Barbara in.
In the second quarter, along with the next Wm builds renewable natural gas plants.
These projects are expected to generate excellent returns that are superior to those of solid waste acquisitions.
Regarding technology last quarter, you heard us discuss cost saving opportunities for automation and optimization.
This involves creating a competitive advantage for WNS by differentiating the customer experience, while reducing our labor dependency on certain routes.
Through our focus on digital technology, we anticipate producing five to 7000 positions over the next four years.
In this tight and expensive job market. It makes complete sense to use technology to reduce our dependency on certain high turnover jobs.
In addition to tackling this attrition technology produces a significant amount of data that we view as a valuable asset.
John has referred to our trucks is rolling data centers, and we're using that data and analytics to create a sustainable competitive advantage. Currently we're piloting the full end to end optimization of our roll off routes, which will be the first of its kind in the industry.
Early efficiency results in our pilots are very encouraging and our plan is to have our roll off routes fully optimized by mid 'twenty three.
Finally.
While we use automation and data to our advantage, we will invest in training and upskilling of our existing employees too.
Existing poised to ready them for higher skilled future roles.
To sum it up we've set the bar high in our first quarter with our results and we're confident in our ability to deliver strong performance throughout the remainder of 2022.
I want to thank the entire Wm team for their hard work and dedication.
I know that they continue to work to deliver on our commitment to our customers our communities and our shareholders.
And we and we very much appreciate that I'll now turn the call over to John to discuss our operational results for the quarter.
Thanks, Jim and good morning, everyone.
2022 began on a high note with first quarter organic revenue growth in our collection and disposal business topping 9%.
Our expectation was that the first quarter would be our strongest quarter of the year, both for pricing and volume growth and our teams delivered revenue that exceeded our expectations core price of seven 3% is more than double the result for the same quarter in 2021, as we work to secure price increases that keep pace with the inflationary environment.
Strong pricing results across all lines of business translated into collection and disposal yield of five 5% with standout performance of seven 9% for commercial and five 1% for a landfill MSW.
We remain confident that our pricing strategies appropriately respond to the rising costs and prioritize our focus on maximizing customer lifetime value.
In the first quarter, we delivered record high core price, while maintaining churn near historic lows by using a data driven and customer focused approach.
Shifting to volumes first quarter collection and disposal volume grew three 8% landfill.
Landfill volumes continue to be strong with MSW volumes, increasing more than 5% and special waste volumes growing almost 30% in the quarter.
While we expect some moderation in special special waste volumes from first quarter levels, Our project pipeline remains strong.
Also contributing to our strong volume results with significant growth in our national account business in the first quarter, our strategic business solutions team won more than $20 million of new annualized revenue.
Wins were driven by our ability to meet customer sustainability operating needs through a differentiated use of customer facing data analytics and services capabilities.
Our teams remain focused on controlling operating costs overall adjusted operating expenses were 62, 3% of revenue in the first quarter, while cost inflation in the first quarter persisted in the high single digits, our operating cost improved 70 basis points from the fourth quarter of 2021, largely due to encouraging trends in our large.
Just cost categories labor.
First quarter overtime costs and training hours came down compared to the fourth quarter of 2021, as we've improved retention and been successful in Onboarding new team members to transition from training hours to productive hours.
On a year over year basis, the increase in operating expenses as a percentage of revenue primarily comes from three areas.
50 basis points in our collection and disposal business related to inflation inflationary pressures, including the proactive and intentional steps, we took last year to increase wages for frontline team members.
40 basis points from the heart from the impact of higher commodity prices on our recycling brokerage business and 30 points related to the alternative fuel tax credits received in 2021 have not yet been renewed for 2022.
When we think about the balance of the year, we expect the inflationary cost pressures to ease in the second half of 2022 as we lap acute inflation that began in the second half of 2021, we.
We do anticipate some pressure on maintenance costs in 2022, as a result of delays in our truck delivery schedule, resulting from ongoing supply chain constraints.
Turning to our residential collection business, we continue to execute on our long term plan to improve this line of business through pricing and automation.
The impacts of higher labor costs are most pronounced in this part of the business and we are focused on appropriately pricing, our contracts and reducing our costs by transitioning more of our residential fleet automated single driver vehicles.
Our first quarter revenue growth results reflect our success in moving residential pricing as our yield was 5%.
And our recycling line of business, we delivered another strong quarter with operating EBITDA growing by $23 million or.
Our blended average commodity price in the first quarter was about $126 per ton, which is in line with our full year expectations.
We continue to see strong demand for recycled materials and we remain focused on educating customers to help unlock additional supply of recyclables and employing technology to maximize the value of the material recovered, while reducing our cost of processing.
And finally, our renewal of our energy business contributed an additional $13 million of operating EBITDA in the quarter, we have a new renewable natural gas plant coming online in the next few weeks in Oklahoma at 17th LNG plant network and the fifth developed by W. N.
The next R&D project is on track to come into service by the end of the year positioning us to deliver on our 2026 targets as we expand our leadership in the landfill gas energy business.
In closing I want to thank the entire team for the fantastic job, they do safely and reliably serving our customers hanging in doubt we got.
Great start to 2022 and look forward to building on our success I'll now turn the call over to Divina to discuss our financial results in further detail.
Thanks, John and good morning, everyone.
Our disciplined pricing programs robust volume growth and solid and recycling performance fueled strong topline growth and that translated into a nearly 11% increase in operating EBITDA in the first quarter, our operating EBITDA growth completely flow through to cash from operations and lower interest payments more than offset modest.
Fine and working capital benefits related primarily to higher incentive compensation payments in 2022 for our strong 2021 format.
We're pleased with these strong results and are well positioned comfortably deliver on our full year outlook.
Turning to capital expenditures first quarter capital spending to support our business totaled $371 million.
An additional $47 million and our recycling and renewable energy.
Given our acceleration of sustainability.
Fourth quarter of 2021, we spend a little less capital on these investments in the first quarter, but we remain on track to advance these projects from 2022 as planned.
We expect that our investments and recycling and Lenovo.
<unk> gas project will ramp up as we move through the balance of the year.
Continue to see supply chain constraints slowed delivery schedules in some asset categories, we're managing spending across our portfolio and expect capital expenditures to support that business to be within our full year guidance of $1 95 to two point their own $5 billion and sustainability growth investments to be approximately five.
$150 million on 2022.
Have you heard from Jim and John actually executing on the recycling and R&D Grant projects, we discussed last quarter and we're confident in our strong return these projects provide.
Keep in mind that these investments are reported as a component of our capital expenditures and reduced our traditional measure of free cash flow yet we view these investments to be similar to an acquisition dollar as they produce high return growth as a strong complement to our existing business.
Putting it all together our business generated first quarter free cash flow of $845 million for.
For sustainability growth investments first quarter free cash flow was $892 million, which puts us well on our way to achieving our full year outlook of between 2.2 dollars $7000.
We are well positioned to allocate our cash to sustainability growth investment traditional tuck in acquisition.
<unk> shareholder returns we.
We used our free cash flow to pay $275 million in dividends in the quarter.
Allocated $250 million to share repurchases, while maintaining our leverage ratio well within our targeted range.
Turning to SG&A, we remain focused on controlling discretionary SG&A spending and leveraging technology investments to reduce the cost of our sales and back office functions.
First quarter SG&A was 10, 1% of revenue a 60 basis point improvement over 2021.
So we fully expect to achieve SG&A as a percentage of revenue.
10% for the full year, even as we continue to invest in technology differentiate wm.
I'll start.
In closing our strong results are a testament to the dedication of our 15000 team members.
Part of our performance in the first quarter and excited about what we can achieve together over the remainder of the year.
With that Laurie, let's open the line for questions.
And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question Russ the pound key.
And our first question comes from the line of Toni Kaplan of Morgan Stanley . Your line is open.
Yeah.
Yeah.
Just given the strength we saw in Q1, just hoping you could add any additional color on you know why not raise the guidance I know you said it puts you in a really good place for.
Reaching the full year guidance, but is it the supply chain issues or uncertainty just in the macro just want to understand some of the drivers there.
I think Tony.
Last year was actually one of the unique foresight. He was the first year, we've ever raised guidance in the first quarter.
So we didn't want to set a trend necessarily I think we felt like the quarter was fantastic sets us up well for the year, but before we would change that outlook, we wanted to get another quarter or two under our belts.
That's great.
What I wanted to also ask about on the labor side, just an update on what Youre seeing in the labor market you know maybe churn.
And just wanted to ask if there is sort of in terms of the projects that you're implementing any sort of impact on like delaying those projects because of the tight labor market.
No Tony.
We've seen some increases in overtime, which honestly moderated over the last couple of quarters. So thats. Good news, we've been successful in bringing down our turnover numbers are not where we want them to be but there are about 300 basis points better than they were two quarters ago. So we're seeing good trends overall on the labor front.
We were to some extent and a little bit of a premium to service some of that business. A few quarters ago was the overtime was up but the good news is that's moderating our overtime percentages are coming down our retention rates are better. So we feel pretty good about where we are and our ability to service any of these volume opportunities efforts themselves.
Then Tony with regard to our.
Our focus on labor to advance the projects that we've discussed and sustainability and recycling.
Thing that's unique about Wm and that we started this journey with a really strong team that's been without those projects over the last several years and we're leveraging that team and building it where appropriate in order to accelerate the investment from here and we're really satisfied with where that stands.
That sounds great.
Maybe just one last thing for me core pricing looked really good in the first quarter.
When you think about sort of the ability to offset inflation. It seems like that should be able to do it can you go beyond offsetting inflation and when do you see core pricing sort of normalizing.
Yeah look I would tell you for the quarter, we were pleased with the results from a price perspective.
We talked about 4% yield and five 5% core price as you know things do moderate a little bit as we get later in the year, just because of the comps change.
So.
You shouldn't expect to see the same raw numbers in Q3 Q4 because of the difficult comparisons, but we certainly have I think shown that.
We're pretty effective at using price to cover our cost inflation I think it's also important that we that we focus on the cost side of the business and that's why we're starting to really talk a lot about technology I mentioned, there's five five to 7000 jobs.
That's.
Low cost way, meaning we use attrition to taken out that will be a significant contributor as we go down the road. So we're not just relying solely on price to improve margins. Some of it has to come from the cost side of the equation is going to be a combination of things that I think get us.
Significant margin improvement path.
Terrific. Thanks, so much and congrats again.
Thank you. Thank you.
Thank you and our next question is from Jerry Revich Goldman Sachs. Your line is open.
Yes, hi, good morning, and Yeah, I'd love to continue the discussion on core price or if you don't mind.
Impressive.
Performance I'm wondering if you can talk about whether you folks went back to customers that had a price increase within the past year with the second price increase or is the acceleration that we're seeing an upside.
As the original expectations driven by higher pricing on contracts.
That are rolling.
Yes, Jerry I'm, not going to say that there isn't a single customer out of our $25 million. It didn't get to price increases, but we really really tried to move away almost completely from that and I hope that there aren't any but.
What we're trying to do is when we take a price increase on customers.
Make it an annual thing and so I can't say with 1000% confidence that something does slip through the cracks, but I would tell you that.
That may have been a practice from years ago, but it but that practices changed so.
Pricing is more of an annual item for our customers.
Yes.
That's super so it sounds like the leading edge pricing is probably a couple of points you been even higher than the strong core price.
And in terms of the landfill gas cadence can you talk about it as the Orange you plants come on line is there a ramp up period to get to full production and full efficiency how quickly relative to the timelines that you all might Jim can we expect the full run rate earnings contribution.
Yes, Jerry.
Most of those plants have infrastructure in place already sort of managing that gas and in most cases. The differences were switching over from the technology, we're using to manage gas to an R&D process. So once the plants up and we've kind of knocked that kingstone. If you will comes out it comes up to speed fairly quickly. None of these are landfills, where we're starting.
With no infrastructure, if that were the case would be different but that's that's kind of our.
Situations and Jerry just to add.
A final point on how we're thinking about the build of financial.
Volume from these brands are 2022 guidance did contemplate these two facilities that we're bringing online in 2022.
And because of the timing of bringing them online. It really did have a pretty inconsequential impact, particularly the one that come in in.
In the fourth quarter.
We do expect a step change in 2023, and we'll give you more clarity on that as we get closer to that point.
Super.
I'm wondering if you folks would be willing to tell us the timing of additional plants coming online in 'twenty three with the type of precise schedule that you've laid out for 'twenty two at this point.
At this point, it's too early for us to give you the details.
Our actively pulling in the equipments in the permitting process and because of the uncertainty in those processes.
We just can't predict at this point with the same level of uncertainty that we've given you for 2022, what we expected the year ahead, but as we get closer to those dates can certainly rob.
Super Thank you.
Thank you and our next question is from Hamzah, Missouri of Jefferies. Your line is open.
Hey, good morning, just.
In terms of pricing.
Do you have a sense of what percent of your customers actually push back on pricing because you know.
Pricing in this sector from one nine to 2012 was you know a very very low 115% and you know maybe the sector farm discipline, Meryl, maybe 2015 and its a small ticket cost item. So you know.
Is it 5% that push back or you know 10% 20%.
Just any sense of that would be helpful for investors.
Yes, so I can't speak to the sector, what I can tell you those couple of those metrics, we pay close attention to one is churn, which in my comments I said its still at near historic lows, we haven't seen really a lot of movement. There even when you look at the pricing that we posted.
For the quarter.
We look at service increases and decreases also a measurement of the health.
And those continue to be positive in a big way and then lastly, the metric. We look at is rollbacks and I will tell you that rollbacks are much stronger year over year. So even as we've addressed this and I think I think we all agree that customers understand that there is real inflationary pressure and I think that's that coupled with the value in terms of service, we're delivering as a reason why you see.
General vaccine or lower despite us having pushed.
Pushed through more on our revenue quality side.
Yeah.
Got it got it right and then just lastly, I'll turn it over.
Do you I guess do you have a sense of what.
As it relates to the sustainability investments.
Does that create more volatility in your portfolio or less volatility.
I know the recycling piece, you talked about sort of more of a cost takeout.
But I guess on the landfill side Rankles the gas side.
I guess have you made a decision on that fixed price versus kind of lever to their end markets.
Any thoughts as to the volatility in the portfolio or something like that.
Is that you have sold more thank you.
It's a great question and one that we're focused on internally in terms of how we'll manage this over the long term.
A larger part of our business.
Volatility in the natural gas business will certainly increase relative to the traditional solid waste business that volatility, though only has the top line of the business and there really is no volatility in the middle of the income statement and so for US it's about how we evaluate.
Every vantage point of the revenue lifecycle and think about what we're expenditure in spot market than what we can secure long term contracts and we are currently addressing some long term contracts.
We've discussed the fact that some of those are extending beyond even 10 years at this point, we want to ensure that while we can set our long term contracts, we down somehow diminished the return of the portfolio because we are making sizable investments here, we want to be sure that were.
Balancing ourselves between spot market and the long term to maximize the returns.
Yeah.
Thank you.
Thank you and our next question is from Michael Hoffman of Stifel. Your line is open Hey, Houston. Thank.
Thank you for taking the questions. So the.
To come back to the pricing, which was terrific and you stood up and delivered on what you said you were going to do is get into market and do it aggressively to make up for 'twenty one.
Just to remind us all your once a year objective is on contract renewal cycles, not just once a year at a point in time is that correct.
Yes, that's right, yes, okay. So there's a rolling effect of price all year long, it's just you're not intending to come out of customer more than ones because the objective.
Well, that's right and.
Thank you.
The point about the price increase being once a year is that there may be some some price is still on the table out there because we didn't take price increases as aggressively in March of last year or in April of last year. So so those will come around I mean inflation didn't really kind of hit us hard until Q3, So you will.
See some.
Some pick up there.
We didn't choose to take even though that customer may have the cost for that for servicing that customer have increased dramatically in Q3 Q4, the price wouldn't have mirrored that until we get to that.
The anniversary this year.
Great and then I fully agree and I appreciate that not raising guidance now allows for the normal seasonality to occur and the like but when I think about what you did did give you guidance, 5% five 5% in corn and 4% of price 2% volume.
One two numbers or how much above your own expectations, where they.
Comparatively the 75 to five five to $3 six how much did you exceed your own expectations.
So on the price side I would tell you you know our expectation had been when.
When we set our guidance that we would.
See stronger price performance and volume performance in the first half of the year than the second half of the year simply because of the year over year comps, we continue to see that math okay.
That therefore means that as we look at the guidance, we established and where we are today that we expect Q1 to be that the peak I would say in terms of the trends on core price and yield.
That being said.
If I look purely at the numbers I would tell you we were about 100 basis points, maybe a little higher than that.
Above our expectations on core price on the volume side, they were stronger than expectations, particularly in special waste.
The rest of the business really performed according to plan.
Well I think commercial was very strong too on the volume Scott I don't know it was it was just generally speaking in line with what we would've projected for the year.
Really optimistic that the.
Commercial volume strength continues but as John in your remarks earlier, the special waste volumes is one of the things that we have our eye on because approaching 30% increase on a year over year basis, certainly isn't something that we have predicted Michael sometimes we talked a little.
What's the current months looks like and we're not seeing anything that would.
That would change our view right now in April .
Fair enough and just so everybody is looking at data the $148 million of volume versus the which is like three 5% versus the almost 8% landfill volume increased the difference there is that there's a huge chunk of special waste and that almost 8% landfill volume year over year number.
Yes, there is.
Starts are definitely special waste was a it was a strong point, but but the great thing about the quarter. If you. If we're really focusing on just kind of this this short term quarter and then the remainder of the year is that we kind of had universal strength and then I'm not sure we've had a quarter like this where virtually everything looks good I mean, even C&D you might.
Look in C&D, and say well that was flat, but if you look at last year with all the fire blood volume minutes.
If you pull that out <unk> was really strong on its own so whether it's MSW volume of our commercial volume or special waste or Sandy everything looks strong we are keeping our eye on the macro economy, because theres a lot of chatter out there about that but we're not seeing any signals right now in those forward looking waste streams.
I did indicate that there is a big downturn coming in I believe you were looking at nothing shows up right.
Okay and then.
The fuel the industry fuel surcharges theyre very good at it we had a big Spike in March.
Can you help us get this right instead of guessing what should we be modeling for that dollar change for the second quarter based on what happened in coming into <unk>, you did $90 million in surcharges <unk>, it's got to be bigger, but what's the right place to be.
A quick clarification on the 90 million net fuel surcharge line. It's important to note that that also in <unk>.
When your overall energy pricing so the fuel surcharge was about $70 million of the 90.
That being said March was about 45% of the quarter and so the ramp that you mentioned was significant as we continue to expect that will persist through the remainder of the year, our prediction right now at $90 million to $100 million per quarter.
Okay, Alright, that's terrific and then.
Since you alluded to the cadence Devine on Capex can you give us a little framing of how we should land that they get the free cash flow per quarter kind of close to right since it's such a big number.
John did a great job of talking about the supply chain constraints and so while we would love to give you some clarity on the cadence of capital for US right now and it's just more difficult for us to predict quarter by quarter, particularly for truck capital, where we're seeing delivery schedules lengthen them.
I would tell you Q2 is usually the point in time that we start to see ramp, particularly in the landfill line of business and so you'll see that I do expect Q4 to be a pretty heavy capital quarter again now for us. So I think you can take our guidance for each of them and make it pretty ratable over Q.
Q2 Q4.
And then you shared with US last quarter your second half of the year.
Internal cost inflation kind of ran at six and 7% what we're really running in the first quarter.
It was closer to nine.
Wow.
And is it coming down.
No. We think that this is effectively the P. Can we expect it to plateau and then as we discussed we expect to see some moderation in the back half because we'll lap the labor increases that we executed upon beginning in the third quarter at 21.
And then last one on the renewable.
Energy side, you have shared that your objective is to try and create that stability on the profit line.
Through the long term contracts.
The big change here is that we're moving away from a transportation buyer to a non transportation buyer.
And have you gotten more than indications of interest that they really are willing to pay a sustained premium.
And I'm not talking current market rate, even just something higher than the long term average of what the rent has been to create that stability on the profit line.
Yes, Michael we've executed a handful contracts Divina commented.
One was around the 10 year, Mark one was a little longer than that and the short answer to your question is yes. It is.
Small percentage the gas we produced now we're gonna continuous Davina said to look to stabilize the portfolio by putting a portion of those contracts in a fixed position.
But the short answer is yes people are willing to buy and yes. They are willing to pay a premium on an <unk> basis.
And it's a non transportation buyer, it's utilities, it's institutions property may not change much right.
Right.
Last question Divina, you've shared in the past that the ramp and the contribution is modest in 'twenty, three and get a little more in 'twenty four and then it really moves up in 'twenty five that that pattern has not changed right where in light of one of the earlier questions.
Yes, that's correct Michael Okay, great. Thank you very much good luck for the rest of the year a nice nice start.
Thank you.
Yeah.
Thank you and our next question is from Walter <unk> of RBC capital markets. Your line is open yes, thanks very much good morning, everyone.
So if we if we go back to the volume you mentioned special waste in and even commercial coming in a little bit better than trend.
We seem to be fairly through the recovery phase and yet you're still putting up some pretty good volume numbers.
Historically, we've always looked at waste is kind of.
If you're a demographic aspects and urbanization, so on being offset by some diversion.
Looking at overall are flat volume cadence over the long term and really pricing being an opportunity is that changing now.
When you look at your your volume trajectory here and the continued growth Youre seeing in volume is there anything structural that you think is going on right now that you think will have.
Longer term.
A longer term impact in terms of perhaps positive volume growth going forward.
I think I think what structurally is changing versus maybe previous.
Quarters.
We're starting to really separate ourselves I believe from the pack. So it is not just driven by micro and macroeconomics, it's driven by the fact that <unk> has.
We don't we don't tend to we tend to on these calls talk a lot about about kind of short term the outlook and what the quarter looked like and what what the remainder of the year is going look like.
Yes.
We also try to inject in a bit of what we're doing strategically and I would tell you Walter we're making huge strides in digitizing our customer service is something airlines did years ago and now we're doing that and it is separating us from from a lot of others in the industry.
We believe we're taking share and I believe that's part of what Youre seeing in the volume picture I can't I can't break it out for you by line of business, but as we do that.
We believe that's a kind of a three five even a 10 year strategy.
Similar to what we're talking about with sustainability.
An awful lot of customers out there that are talking to us about data and analytics for their their own sustainability initiatives and we're really the only one that can provide that level that they are asking for nobody else can do that so.
I would tell you. This is not just about micro one O. One this is about not only microeconomics, but it's also about this strategy, we're putting in place that I believe is absolutely taking share and we will take more share as we further differentiate ourselves down the road.
I think if that is true.
You know you would probably see it in the special waste in commercial areas, which is where you are indeed seeing the strength.
That's absolutely right and look the short story is that's why I'm. So bullish on this company, obviously I'm biased, but I got to tell you I mean.
I'm really bullish on it even at 160 Bucks I mean.
The strategy to me, whether you are talking about the brand that can't be matched.
The labor the reduction of labor dependency, which doesn't.
Address the volume aspect, but addresses a cost aspect and using.
The digitalization of customer experience and to help us reduce our labor dependency by five to 7000 jobs Hasnt gotten a lot of comments from investors, but that's a big deal and so all of that I think helps separate us from others, who just simply can't replicate.
Well, that's great great point.
Turning now to M&A.
You know one of your competitor, obviously, obviously has moved a little bit outside of pure solid waste into a little bit of hazardous and theres been some discussion or or rumor out there that you may do the same without you commenting on that is that something.
Conceptually that's in the cards for you or solid waste kind of your singular focus for four for M&A opportunities.
Yes, I mean look we've seen the rumors.
But I would tell you this.
Just as I went through with you kind of our strategy, which is really an organic strategy. We're really pleased with the with the results of our organic strategy and at the same time, we'll continue to look at some of the small tuck ins. We may do something that's that's that's an adjacency we've talked about those as well that are related to our <unk>.
Sustainability strategy.
And that's probably where we draw the line as far as M&A goes I will tell you that in my view there are reasons today to be conservative when it comes to.
M&A.
Goes back to what I said.
US being differentiated some of these other haulers by the way some of them are talking to us that have pressures on on driver and technician turnover significant pressures on non driver and technician turnover that are absolutely seeing wage inflation there.
They are having a difficult time getting capital equipment, probably times, two versus where we are and they don't have a sustainability service offering that is now being requested.
Those are reasons to not go out and pay a big heavy multiples to acquire some of these folks.
Very good points I appreciate the color and congrats on a great quarter.
Thank you.
Thank you and our next question is from Tyler Brown of Raymond James Your line is open.
Hey, good morning, guys.
Hi, Good morning, Hey.
Hey.
I missed it but I was hoping you could just give us a little more color on the 70 basis point decline in margins.
Thinking about some of the puts and takes takes there I'm thinking about things like fuel commodities, maybe the tax credits maybe that would have influenced the year over year, because with 9% core inflation and call. It a five 6% yield work where core margins down.
So it's really.
One thing when you look at that the margin of the quarter. It certainly outperformed our expectation and that started at the top line and continue.
Continued through in terms of managing costs, which John mentioned earlier, particularly on the labor side.
I think what's important is that in normalized for the fuel tax credits first because that really gets us focused on the rest of the business and how it performed and that was 30 basis points and so when you look at Q1 performance and you can see that.
Were only down 30 basis points on a year over year basis, and that compares to our expectation that we'd be down about 100 basis points in the first half. We're certainly very pleased with that performance.
Overall puts and takes just to build the brand.
And that I would tell you the positive drivers from a margin perspective in the quarter were 20 basis points from the renewable energy business.
10 basis points of leverage on the SG&A beyond.
Expectations with <unk>.
This is the brokerage business.
Led by the brokerage business includes all elements of the recycling line of business, but that was down 30 basis points on a year over year basis.
And then the collection and disposal business overall was down 30 basis points, but what's really important to highlight there is it sequentially improved 50 basis points. When you remove the impact of the fuel tax credits. So we're really pleased with that performance and it outpaced our expectation we still remain calm.
She asked about margin in the first half of the year relative to prior year because as a reminder, Q2 of last year was I believe an all time high at 29, 3%. So we still expect margins in the first half to be on it.
A year over year basis, a more difficult comp and therefore, a decrease but we expect the margin momentum that we began in the first quarter to continue throughout the year.
Okay.
Second question, so its still going to be solved it feels like in the first half I don't want to put you too much on the spot, but do you think that margins can still improve.
Full year, despite the dilutive impact from the fuel and I'm thinking that fuel.
Maybe an extra 50 basis points of dilution, but I don't know if that's if that's in the right Zip code.
So I mean, a separate fuel tax credits and the impact of rising fuel costs. The fuel tax credits I would tell you. We hope it's a timing difference our outlook right now is that that 30 basis points may continue.
And we would love to see resolution sooner rather than later, but we think it could go all the way through the fourth quarter, but we do expect that to be a timing issue only not contribute to the margin of the business overall from diesel fuel rising cost perspective.
We certainly saw that impact in the first quarter and like I said earlier it ramped in March we estimate that the impact of that for every dollar change in diesel fuel is about 20 basis points of margin pressure.
Okay Alright.
So my previous points of Walter about margin.
There is there seems to be a real focus on pricing, which is the right focus but when you think about margin. There is a cost aspect to that so just to give you a couple of examples.
Yeah.
We fully expect that with the digitalization of our customer experience for example.
We have built into our plan that we won't re hire some customer experience positions.
Mike Watson about this morning, and and so we've built that into our plan probably as many as 300 positions that wont re hire when they trade away. So this isn't this isn't laying anybody off this is youre, saying when we have 50% turnover in some of those positions.
Cause come through our call centers that are asking for EPA or asking for SaaS or a payment or a bulky pick up those have fully been automated and so we've agreed that we won't replace those positions.
And that amounts to somewhere in the neighborhood of 300 positions for the year that we built into our plan. Similarly with this move from railroad to Asl, We think theres as many years as 2000 those that over the next four years come out and so you get.
I help her on the back of the truck that comes out but you also gas when we know this from experience of 30% pickup in inefficiency when you move from railroad to yourself.
Brent Bill taking out positions as we automate these plants somewhere in the neighborhood of 1000 positions nasty and I say that because it will be we'll be upscaling. Some positions. There. So that includes both positions coming out.
And then positions being added back in the net of that is somewhere in the neighborhood of one thousands of 1200 positions over the next four years at all and some of those do start hitting us in 2022.
And then really accelerate in 2023 all of that in addition to what we're doing on price will have an impact on margins.
Right very idiosyncratic I appreciate that fully so the bigger question on the on pricing so.
Can you break it down on the five five collection and disposal yield between call. It your open market senior more restricted markets because it feels like a lot of the pricing momentum is being driven in the open market right now, but that CPI waiting through that regulated return pricing should accelerate at 22 plays out so I know you.
We're talking about the high watermark in Q1 on core price, but why would fade. If the restricted piece is going to accelerate or is it just not enough.
Mathematically to get it to keep it keep the pricing where it is today.
So.
However, I think the easiest way to look at it we don't have specific breakdowns between.
Open market and restricted prices, but what we've talked about is with rate restricted pricing, we do lease that about 70% of that in the first half and so it does meet that being loaded towards the first half is one of the reasons that we expect the high watermark to existing and the first half relative to the second half.
And then it comes back to the comp, but I would say is that our pricing on the street continues to have momentum over the course of the year as our contracts come up particularly on the open market and some of them you know actions that we took and the impact of fuel that we discussed will certainly.
We continue to drive price higher that's not reflected in our collection and disposal yields but.
I really do think that this comes down to being focused on our market base pricing and knowing that that momentum is not slowing.
Just the comparisons on a year over year basis, and the fact that we started to take pricing action more reflective cost environment in the second half of last year.
Okay. No that is very helpful. Thank you guys. So much.
Thank you and our next question is from David Manthey of Baird. Your line is open.
Yes. Thank you first question on labor and benefits.
Both Opex and SG&A I think you'd noted that.
The proactive 2021 wage increases from last year, but are there any other.
So that cost stacks that are elevated or understated this quarter that we should watch for for the remainder of the year things like I don't know incentive comp or health care or anything like that.
We'll start the operating site in a meaningful way and then maybe yesterday and benefits.
We spoke to that we spoke to labor, obviously been a long pole on the tent continuing to see high single low double digit inflation.
On labor I think it's most pronounced we mentioned in the residential line of business most labor intense.
Line of business that we have I would tell you it maintenance in my prepared comments, David and we think that if there are some supply chain disruptions that linger through the balance of the year, we may be in a position, where we're going to keep some of our older fleet employed for a little bit longer until we catch up we don't see that as a barrier to me I will take.
Vantage of some of the volume and market share that Jim commented on it may put a little pressure on opex versus capex, but as Davina said, it's early in the year and we've got a little bit of time here before I think we need to pick up that would be one spot in the P&L, where you might see it in the up on the operating side and then on the incentive compensation and health and welfare, specifically, what I would tell you is I do.
Think that incentive compensation could modestly increase over the remainder of the year on the Q1 level just as we get further into the year, we will get finer on our estimates and outlook and therefore the accrual.
But with regard to health and welfare, we are seeing the trends of those costs return to pre COVID-19 levels, where medical activity is getting back to normal and as a result, those costs are pretty well in line with what we would've expected.
You tend to moderate over the remainder of the year.
But nothing unusual on a year over year basis.
Okay. Thank you and second on recycling.
Could you update us on what percentage of recycling revenues are under some sort of.
Some form of fee for service agreement.
Historically, you've told us that about two thirds of the material.
But she collected zero to negative value and I'm wondering is that still directionally the case and as.
As you put it in his state of the art automated merck's does that percentage change materially.
So David the MRSA, we're automating, our certainly producing a better product and doing it more efficiently and I think that model actually gets better with the labor increases we're seeing right. We're employing less labor in these plants to rates are going up so the investments we're talking about 18 months 24 months ago and upgrading these plants is actually printing better not just because.
The arbitrage has gotten better the quality of the product coming out of these facilities is better when you use a mechanized process to pull that material outage stands to reason that you would get a better cleaner.
Product coming out of there I think on the <unk>.
Pricing side, what we're seeing is very consistent and strong demand on the.
Fiber side mixed paper has been a good tailwind over the last couple of years and we're seeing continued demand increase for some of the other streams. The plastic streams. So we feel good about the top line and the demand that's being created in as I mentioned, that's something we're going to continue to do is to educate our customers and use technology to unlock.
Some of those some of those streams I would tell you in terms of negative value. The one that probably stay I mean, there is a residual contents attracts in the high teens to about 20% we've been working on getting that down over the last few years, we feel technology will continue to help us in that regard, it's really the residual piece.
Glass right, there's not really any positive market for glass.
There is an environmental benefits into arguably keeping it out of the stream, but theres not a market that's positive for glass at the moment.
I catch all your questions.
That does it thank you very much.
Thank you and our next question is from Sean Eastman of Keybanc Capital. Your line is open hi.
Hi, Tim Thanks for taking my questions.
Just coming back to the margins.
As a summary.
Do we need to be thinking about that zero to 40 basis points of.
Of expansion for the full year differently in light of what we've seen in the first quarter.
And the movements on fuel.
And are we still going to be down 100 bps in the first half like you had communicated previously if youre willing to sort of refresh those expectations.
That would be super helpful.
So Sean I think fundamentally what this comes back to us.
Not wanting to be in a position to revise guidance across the board after just one quarter.
And so the overall trends that we expected were our first half comps are just going to be tougher from a margin perspective in the second half comps and therefore, we will relatively underperform, our full year outlook in the first half and see a build as we get into the third quarter in terms of margins.
Performance still holds.
In terms of the magnitude of it I think you know Tyler's question earlier about the impact of fuel framing that as about a 20 to 40 basis point impact given what we're seeing in diesel fuel.
We're pretty satisfied that we're gonna be able to absorb the negative impacts of that.
And so when we look at full year outlook for margin, we do see some upside.
Particularly because prices come in so strong and we've seen positive momentum on retention. It's just too early for us to update the specificity with regard to how we see that flowing through for the rest of the year.
Okay totally fair great answer.
And coming back to the alternative fuel tax credit dynamic.
And those not being renewed yet how is that built into the full year and how big of a swing is that.
Or once those those tax credits are renewed.
Yeah. So it was $12 million for the quarter or the full year impact is expected to be a little north of $55 million. So the impact for the remainder of the year, we estimate to be about $45 million.
We fully expect that we will end the year with some clarity on this but if we don't receive that clarity it would be about $55 million to $60 million negative impact relative to the guidance that we provided.
Okay excellent and then just just real quick relative to the $400 million EBITDA guidance for the RMG facilities by 2026 can you tell us what that EBITDA number was in 2021 actual and what that number is in the 2022 guidance.
And I don't have to specifics on that and then Heather we'll be able to get any more color. The only thing that we provide as the year over year increase and that was $13 million of a year over year benefit in the quarter.
The color there I would give you is that we estimate that for every 10% change in RIN values, we see $4 million to $5 million.
The change in our EBITDA and that continues to hold through 2022, we will see that increase as we get into 'twenty three with additional production.
I think it was about a $180 million in 2021.
Got it.
Can you clarify that.
I think it was about $180 million.
Okay got it alright, thanks, a lot guys nice job.
Thank you.
Thank you and our next question is from Milwaukee of Oppenheimer. Your line is open.
Good morning, you mentioned you picked up about 20 million in annualized National account revenues. This quarter. I think you mentioned also the sustainability services were a big driver of that so Jim I just wanted to build on your comments earlier can you give us some events or some examples for investors of what services the customer is actually.
Asking for and values, what youre, providing here.
Ed maybe smaller competitors arent, that's helping you to win this business.
Well when we talk specifically about about national accounts.
And that data and analytics are very important to them and they all have sustainability initiatives every one of them and so when we think about renewing some of these big national accounts that we renewed or signing new accounts.
One of their primary asks us what kind of reporting tools do you have that can provide me information on a store by store basis. For example, so that's critically important and that's been a real differentiator for us.
Okay. That's helpful. Thanks, and then I just wanted to understand a little bit.
The way you're proceeding with the automation initiative.
On the resi line.
Transitioning to a S health.
Are you thinking about those investments is timed with contract renewals or is this really substitution for fleets that are on existing contracts in other words. This is sort of a mid contract type initiative.
So I would tell you where we have the opportunity to do what made contracts, we're going as fast as we can we're not waiting so to speak where contracts.
To roll.
I think a lot of municipalities, we're having some really productive discussions with them because they've seen whether that we're a service provider or not that's a strain on our labor is showing up in the ability to service some of these municipalities and we've seen opportunities.
Ben and convert these mid contract and certainly to the extent that we are not able to do that there is that period of time. When these municipalities are franchises or calling out for bigger RFP and we're trying to make sure. We're in front of that to have productive and educational conversations if you will about what the benefits are automating.
These services mhm, but just to clarify it and for some of these these are these routes are these municipalities.
Container may have to change as.
As well so there is some some work of all trade in educating and getting that that change.
In place, but for you just to clarify the ROI is good enough such that you can put it in the time and effort to have those changes take effect and.
And convert the fleet over and you're just getting the savings on the labor and the efficiency.
Absolutely I think for the municipalities you bring up a good point when you go to kind of pick up everything at the current model to a containerized model. It helps in terms of the municipalities understanding managing their costs and.
And the quality material on the recycling side and I think I wont go down this rabbit trails that of all the technology, we put on the trucks becomes that much more valuable when you automate the service and we've got the ability to look at each of these transactions to help educate these customers. When you think about the returns no I mean it is.
It's a pretty easy math equation.
On the negative side of the Ledger, you get a higher capital cost per an asl versus real order to the tune of about 60 Grand maybe.
20% of the cost vehicle, but but on the positive side, obviously, you get a help we're coming off the back put whatever number you want on that.
That is perpetual whereas.
The capital cost is a onetime cost for the life of the vehicle.
And then you get.
Our safety improvement you get a 30% as I mentioned that 30% pickup in productivity.
Our efficiency because we're just we're picking up 30% more homes per hour with an asl than we are with the rear loaders. So that the math is really compelling makes sense for us to move as quickly as we can with John's point.
Great. Thanks, so much.
Yeah.
Thank you. Our next question is from Michael Feniger of Bank of America. Your line is open.
Yes, Thanks, guys for squeezing me in just on pricing you mentioned Q1 is the high watermark and we think of 2020 with your core price of five and a half yield of four just why wouldn't those parameters just.
Top down view why would why wouldn't they be higher in 2023 is that what we should be expecting would you let your foot off the gas maybe on the open market as restricted reset higher next year I guess I'm just trying to put it together with the Q1 being really strong that the high watermark yet.
Going to decelerate a little bit in the second half how do we think about those 2020 parameters as we kind of move through 2023.
I you know I think well I may have said it a couple of times already I do think some of it becomes about the math.
<unk> done it and make it really simple.
So looking at that but next year's Q1 comp will be very difficult. We do think there is benefit from the rate reset on the restricted part of the book because 50 years lease that didn't fully contemplate all of the loan size.
They are backward looking but we think they'll be another step change in that part of our culture.
A year from now.
And Henry.
Activity on that.
On the <unk>.
We are funding.
This momentum down that we would like.
Okay.
Cost inflation environment.
Allow us to view this a little differently going forward and I think our focus on the customer lifetime value, we will always ensure that we're being data driven.
My assessment.
Our pricing efforts.
That's very helpful and just last one Davina you mentioned, how the cost inflation stepped up from seven 5% in second half, 2% to 9% now obviously you guys are driving price I'm, just curious what's kind of embedded on that full year cost inflation, because I know there is expectation that that's going to moderate with the costs, but how should we kind of think about that.
Plus nine number for the full year.
We generally look at our cost of inflation at 3% to 4%. So just.
Normal course.
At that level.
Got it.
<unk> meaningfully higher than that now our expectation in the back half of the year isn't necessarily that we get all the way back down to 3% to 4% that we land somewhere in between.
Yes.
Got it thank you.
Yes.
Thank you and our next question is from Kevin Chiang of CIBC. Your line is open.
Thanks for taking my question I'll be quick here Congrats first of all congrats on a good quarter.
Maybe just on the on the comments you made it a few times, Jim just on the data analytics and the demand from national accounts for larger customers and requiring the state as they they go on their sustainability path.
That would be charged score is that looking at accelerated revenue service.
And if not at the peak, how many full rate revenue services with respect more.
More customers are going to need to kind of track there.
You know the scope three emissions in the blood.
Their environmental footprint.
Yes, it's a good question Kevin.
We currently charge kind of a separate price for it its taxes together and our service offerings from national accounts, but it's an interesting.
It's kind of an interesting prospect that could we could we charge something and it's something we've thought about because we charge for these separate services.
Related to data and analytics.
For today the answer is it's a package deal for tomorrow potentially something we can charge for.
Separately.
Okay. That's helpful and that's kind of a follow up question you can kind of mentioned again. This is one of the.
The beavers youre pulling on to grow.
To grow volumes above above what the market is doing when you're taking share.
I suspect maybe the smaller accounts that this might not be a service that is appealing to them.
Solving other pain points for customers is.
Thank you grab that market share and it doesn't feel like you're getting aggressive on price to win volume. So what are some of the other pinpoint you must be solving for.
Let's say smaller accounts that they're onboard with waste management.
If it's something pricing driven.
I think the sustainability piece should be important to everybody, but youre right I mean, it tends to be more important to the bigger customers.
When we think about the digital approach that we've taken to customer experience that impacts everyone is well and that may or may be even more heavily used with smaller customers.
I refer to the airlines a lot.
And what they did on the front end of their of their operation with moving away from the call centers 20 years ago.
We're in that process, now, where where digital digitalized and that entire customer experience.
And everything can be handled via your personal device or.
Your laptop at home and you don't have to reach out to a call center. That's why we've said look for those for those positions as they as they are trends.
We've made a decision to not replace any of those and that starts and kind of cute Q2 Q3 of this year.
That's that's helpful. I'll leave it there has been a local thank you very much congrats on good quarter again.
Thank you. Thank you.
Thank you and there are no further questions on queue I will now turn the call over to President N T.
Jim fish.
Alright, Thank you well I guess it goes without saying that we're very pleased with the quarter. The short term outlook is very bright for us.
Even with some of the economic pressures that were discussed today, but I think.
Most importantly, we are really focused on the strategy that produces.
We think great results in differentiated results over the next three to five to even 10 years.
We're excited to see the results of those.
Thank you all for joining us this morning, and we will talk to you next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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