Q2 2022 Waste Management Inc Earnings Call
Okay.
Okay.
Thank you for standing by and welcome to the W. <unk> second quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session to ask a question if that's okay.
Please star one one when you touch tone telephone.
At this time I'd like to turn the call over to your host Ed Echo.
And your director of Investor Relations. Please go ahead.
Thank you Valerie.
Thank you everyone and thank you for joining us for our second quarter 2020 earnings Conference call with me. This morning are Jim Fish, President and Chief Executive Officer, John Morris Executive Vice President and Chief Operating Officer, and Davita ranked executive Vice President and Chief Financial Officer, you'll hear prepared comments from each of them today Jim.
But from a high level financial to provide a strategic update.
I will cover an operating overview and to be able to cover the details of the financials.
Before we get started please note that we have filed a form 8-K. This morning that could be earnings press release and is available on our website at www Wm Dot com.
8-K, the press release and the schedules to the press release include important information.
During the call we will 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.
These risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K.
John will discuss our results in the areas of yield and volume, which unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume.
During the call Jim Jonathan Avino will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons unless otherwise stated will be with the second quarter of 2021 net income EPS operating EBITDA margin and operating 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 non-GAAP projections.
This call is being recorded and will be available 24 hours a day beginning approximately what PM Easter time today to hear a replay of the call access to the <unk> website at Www Dot investors <unk> com.
Time sensitive information provided during today's call, which is occurring on July 27, 2022 may no longer be accurate at the time of a replay.
Any redistribution retransmission or rebroadcast of this call. It 84 without the express written consent.
It's prohibited now I'll turn the call over to WEX, President and CEO Jim fish.
Thanks, Ed and thank you all for joining us.
The strength and resiliency of our business was clearly on display in the second quarter as we built on our first quarter momentum to deliver results.
Ceded our expectations.
Our teams remain focused on recovering inflationary cost pressures with our strongest ever core pricing yield results.
Our pricing results combined with volume growth and sustainability contributions drove quarterly revenue above $5 billion for the first time.
Our robust revenue growth translated into operating.
Adjusted operating EBITDA growth of seven 8%, which is above the upper end of our long term growth profile of 5% to 7%.
Cash from operations remained strong in the second quarter positioning us to return more than $5 billion.
Of cash to our shareholders to bring the year to date total of shareholder returns to more than $1 billion.
You'll hear more details from divina, but our strong start to the year gives us confidence to increase our 2022 outlook for revenue.
Adjusted operating EBITDA and free cash flow.
Okay.
In the second quarter, we continued to see strong volumes and encouraging sign for economic activity across the areas we serve.
Currently our key business indicators point to continued positive economic activity.
That said <unk> is well positioned in any economic environment.
Our resilient business business model is underpinned by our diverse customer base and essential nature.
And so the nature of our service and the annuity like characteristics about 75% of our revenue.
We continue to advance our long term strategic priorities providing.
Providing the best workplace for our employees investing in technology, and automation that differentiate SWM and permanently reduces our cost to serve and leveraging our sustainability platform for growth.
Investing and making WMA great place to build a career, while also reducing our labor dependent seats for attrition and automation together position us to navigate this tight labor markets.
And our sustainability growth journey, we achieved two exciting milestones in the second quarter we.
We opened our fifth Wm owned and operated RMG plant in Oklahoma.
The first of the 17, new R&D facilities, we announced.
That are expected to add 21 million btu of R&D to our renewable energy portfolio by 2026.
We expect to complete construction on the next R&D facility by the end of the year.
On the recycling front, we brought online our Houston Murph, the sixth redesigned recycling facility utilizing advanced technology to reduce labor and improve product quality.
Our advanced technology, Merce are yielding tangible benefits, resulting in about a 30% labor cost savings per ton compared to the rest of the single stream network.
In the second half of the year, we expect to open two additional advanced technology recycling facilities and answer any of your recycling market keeping us on track to meet our recycling investment goals.
I want to take a moment to discuss our capital allocation priorities, particularly related to M&A.
Our strong operating EBITDA growth has allowed us to absorb the $4 $6 billion acquisition of advanced disposal and quickly return our balance sheet to pre avs leverage levels.
We consider a typical M&A year to be between 100 and $200 million of acquisitions.
This year, we have the strongest pipeline we've had in a long time and expect to close between 300 $400 million of acquisitions.
We will remain disciplined in our approach to traditional solid waste tuck in and recycling acquisitions to maintain our strong financial position and generate industry leading returns.
Our cash generation, plus our strong balance sheet affords us the ability to allocate capital to our priorities investing in organic growth and sustainability initiatives.
<unk> growing our dividend.
Fleeting accretive acquisitions, and returning cash through share repurchases.
In conclusion I want to thank the entire <unk> team for their hard work and dedication.
I am excited about the remainder of 2022 as we continue to deliver on our commitments to our team members customers communities and shareholders I will now turn the call over to jobs discuss our operational results for the quarter. Thanks, Jim and good morning, everyone.
Once again, we achieved exceptional organic revenue growth in the second quarter went by collection and disposal yield of six 2% our pricing accelerated sequential sequentially as we continue to address persistent inflationary cost pressures throughout the business.
Second quarter core price increased 20 basis points from the first quarter to a record seven 5%.
Core price was strong across every line of business and we had standout performance of 10, 6% in our industrial business and nine 4%.
Our commercial business customer receptivity to our pricing remains strong as second quarter churn adjusting for the intention of loss of an unprofitable national account contract was 9%.
We remain confident that our pricing strategies are appropriately responsive to rising costs, while prioritizing customer lifetime value.
<unk> continue to be focused on disciplined pricing in the second half of the year and we now expect 2022 core price up more than 7% and collection and disposal yield approaching 6%.
Key indicators of our business continue to signal healthy economic economic activity in the quarter second quarter collection and disposal volume grew two 3% with commercial volumes growing one 6%.
Waste volumes up more than 19%. Additionally.
Additionally, new business exceeded lost business and service increases continue to outpace service decreases by a wide margin.
Second half volumes are expected to remain strong and for the full year, we expect collection and disposal volume growth of about two 5%.
Our teams remain focused on controlling operating costs adjusted operating expenses were 62, 4% of revenue in the second quarter of.
130 basis point increase from the second quarter of 2021.
The year over year increase in operating expenses as a percentage of revenue was largely driven by fuel and commodity price impacts.
70 basis points from higher fuel costs 30 basis points related to the alternative fuel tax credits received in 2021 that have not yet been renewed for 2022, and 30 basis points from the impact of higher commodity prices on our recycling brokerage business.
In the second quarter, we again saw high single digit inflation in our costs and we are managing through this with both pricing and cost controls.
Our core prices recovering our cost of inflation in each line of business, except the residential where the impacts of higher labor costs are most pronounced in that line of business. Our conversion of approximately 2000 railroad routes to automated side loader will both reduce labor and significantly improve efficiency.
This is one of the ways, we are investing in technology to reduce our dependency on certain high turnover positions.
<unk> early results from our pilot programs to fully optimize our roll off routes are showing efficiency gains in the range of high single to low double digit percentage increases.
As we move into the second half of the year, we expect inflationary cost pressures to ease on a year over year basis, given the proactive steps, we took to raise frontline wages in the second half of 2021.
As Jim mentioned, we're excited about growth opportunities in our recycling and renewable energy businesses and both businesses continued to deliver strong results together recycling and renewable energy contributed $19 million of operating EBITDA growth in the second quarter.
Our recycling business on track to deliver results on par or modestly higher than the record earnings we achieved in 2021.
Our blended average recycling stream commodity price was $131 per ton in the second quarter and we continue to expect a full year average of $125 per ton.
In the renewable energy business better pricing for our renewable natural gas electricity and environmental credits is driving our full year outlook for this business higher than our original guidance by $35 million to $45 million.
Overall, our second quarter results exceeded our expectations as we demonstrated our ability to execute on our disciplined pricing programs and manage costs I am extremely proud of how the entire WMC worked together to provide safe and reliable reliable service to our customers I'll now turn the call over to Devine to discuss our financial results in further detail.
Thanks, John and good morning.
<unk> operating and financial results of the second quarter confirmed a number of important indicator.
Your line is open.
Wanting us to increase our full year financial outlook.
Cover updated guidance in a moment, but wanted to give a little more color around our second quarter and year to date financial.
Financial inspiring.
As John discussed our results have been driven by robust organic growth led by our disciplined pricing okay.
As well as diligent.
Matt.
Proactive management of our SG&A has been an important element of that.
Management Catherine.
Second quarter adjusted SG&A was nine 4% of revenue a 20 basis point improvement over the same period in 2021.
We accomplished this result in spite of an increase in incentive compensation due to our focus on controlling the.
Questionary SG&A spending and leveraging technology investments to reduce the cost of our sales and back office functions.
We are on track to deliver SG&A as a percentage of revenue of about nine 6% for the full year.
Operating EBITDA increased more than $100 million in the second quarter, driven by an increase in the operating EBITDA of our collection and disposal business of $107 million.
Operating EBITDA margin in the quarter was 28, 1%.
The 50 basis point improvement from FX.
2020.
We are confident in our ability to achieve our full year margin outlook.
A particularly strong result, given the dilutive impacts from rising fuel costs, which we now estimate would be about 60 basis points for the year.
Year to date cash flow from operations was up $142 million or about six 5% from the prior year.
Driven by operating EBITDA growth over 9%.
Cash flow from operations was slightly muted relative to operating EBITDA grafts, you got higher cash taxes.
Continuing throughout the year and working capital pressure that we expect to moderate over the remainder of the year.
During the first half of the year, we've invested $856 million in capital to support the business and we invested an additional $112 million to support the strategic growth of our recycling and renewable energy businesses are.
Our year to date free cash flow, which includes the impact of capital outlays to support our sustainability growth investment at <unk>.
<unk> three 5 billion.
I think that's on pace to exceed the upper end of our initial 2020 to your guidance of $2 <unk>, One 5 billion.
While the pace of capital spending has been slower than expected in the first half of 2020, we currently expect truck deliveries landfill construction and sustainability capital projects to ramp in the second half of the year.
We're encouraged to see supply chain constraints on certain asset categories begin to show comments on signs of improvement that we are proactively managing the business in anticipation of the longer delivery schedule.
<unk> experienced over the last year.
We will revisit capital and free cash flow guidance in more detail next quarter.
As Jim discussed, we are well positioned to allocate free cash flow among all of our capital allocation priorities.
In addition to increased acquisition expectations for the year, we now expect to allocate our full $1 $5 billion authorization for share repurchases.
Turning now to our updated 2022 guidance we expect.
Revenue growth of approximately 10% and adjusted operating EBITDA in the range of five five to $5 $6 billion.
The $175 million increase in operating EBITDA guidance it's.
It's driven by more than $325 million from increased price and volume performance.
And $40 million from better performance in our renewable energy business.
Those things are partially offset by an approximately $190 million higher costs, which are driven by a combination of inflation pressure and incentive compensation.
This outlook assumes fuel prices remain at June levels for the second half of the year equating to a 60 basis point drag to full year operating EBITDA margin.
Even so we expect to deliver a margin of 28, 1% at the midpoint of our guidance.
We remain optimistic that the alternative fuel tax credits will be approved in 2022 and continue to include the approximately $55 million benefit we would expect to receive and our outlook.
In closing our excellent first half performance sets us up to deliver another year of strong financial growth in 2020 Q.
And thank the <unk> team enough for all their contributions trusting that.
With that Valerie, let's open the lines for question.
Thank you again, ladies and gentlemen, I'd like to ask a question. Please press star one one when your telephone one moment. Please.
Our first question comes from Tyler Brown of Raymond James Your line is open.
Good morning.
Good morning, Kevin.
Hey, <unk> bin.
You guys threw out quite a bit in the prepared remarks, but I just want to make sure I have it so on the down 120 basis points on the margin walk it was <unk>.
70 basis points fuel <unk> credit and <unk> from commodities is that right.
That's right and that's looking at the operating expense line.
Right.
Also.
For the EBIT.
And I think it's important in thinking about EBITDA margin in Q pieces. So one is how did we perform relative to the expectations that we laid out at the beginning of the year.
We can say there is that we're extremely pleased.
Really our outperformance relative to your expectations as Vince you place it will thats, our traditional solid waste business that outperformed expectations by about 40 basis points and the renewable energy business that outperformed expectations by 20 basis points. As we've mentioned we've had a couple of headwinds relative to your initial expectations.
And those headwinds are fuel and the alternative fuel tax credits as well as incentive compensation, but when we put all of that together and think about our outlook for the full year and our performance in the first half, particularly relative to our original guidance.
We can say that were 60 basis points ahead of expectations.
<unk> based performance and that's a really strong outlook, but when you look at Q2 specifically.
A walk forward between the 29, 3% that we achieved in Q2 F. 'twenty, one, which I'll remind everyone is the best quarterly performance that we've had in our history from a margin perspective to what we delivered a 28, 1% today for Q2 really fuel is the story there.
In terms of that walk forward. So what you saw.
And that 120 basis points.
80 basis points led by store and that 80 basis points is 50 basis points from higher fuel costs 30 basis points from the alternative fuel tax credit recycling was 40 basis points negative.
That was in line with expectations 30 basis points of that is from the <unk>.
Rich business that we talk about where it's effectively pass through revenue so higher commodity.
Prices just translates into pretty much dollar for dollar increase in cost.
And then the other piece of that with higher incentive compensation cost at 30 basis points, So really happy with the strong performance of the solid waste business.
I think that's the highlight when you look at the margin for the business in the quarter.
Sorry, excuse me as CFO .
I'd say that was extremely helpful very detail.
Real quickly not to focus too much on the margins, but it does feel like Youre looking for a margin uplift in the back half I think somewhere circa I'll call. It 50 basis points, but I just want to kind of think about it conceptually. So is it that the pricing contribution will kind of hanging around the same place, but your unit cost inflation kind of it.
This is because.
I think John talked about it you pulled some frontline wages.
I believe for it in the back half of 'twenty, one is that kind of how that will work.
Yes, I think that's right Tyler.
We got out in front of the labor issue kind of Q2 Q3 last year. So we feel like while we're still seeing labor inflation, that's not going to be at the same rate. There's other obviously inflationary pressures, but I think you got it right okay.
Okay, Great and just my last one John just real quick can you remind us what percent of your revenue is call. It temporary roll off the C&D landfill volumes, just let me get into some questions about housing just kind of your exposure there.
Yes, we're not really exposed too much there Tyler the temp Sandy business is low single digits.
Okay perfect. Thank you so much.
Thank you thanks, Tim.
Our next question comes from Jerry Revich.
Of Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone nice quarter.
I'm wondering if we could trouble you just for an update on how pricing is tracking now that you're.
Landfill gas facilities are coming online Jim how are you feeling about the pricing point relative to the mid Twenty's that you underwrote the investments and then.
As the offtake market.
Developing thanks.
So I thought you were going to go down.
Solid waste pricing path.
On R&D.
Look I think our expectation here is that.
We built and $2 80, Jerry for the back half of the year, we think.
That's pretty comfortable.
You know based on our discussions from where with you then.
<unk> the business.
Pro forma at much lower numbers.
And even at those lower numbers.
$2 per annum in $2 50 natural gas even at those lower numbers. This is an outstanding business in terms of the returns, but specifically for the back half of 'twenty to our expectations.
<unk> is that we will see $2 80.
And RIN pricing and we feel comfortable that number.
And Jim in terms of the offtake market is that developing.
Your level of inbounds for folks that are looking to lock in long term agreements.
Can you comment on how those conversations are going.
It's Eric I would say yes.
Obviously, the rig market is what it is and it's a part of our portfolio, but we have started as we commented I think last quarter to quarter before starting to do some direct off takes for renewable natural gas and we're seeing good momentum in some of those contracted rates.
Okay Super.
If you want to talk about.
Solid waste pricing can we talk about that so big CPI tailwind into next year, obviously positive revision to <unk>.
Pricing over the course of this year as you look at the book of business today Whats your best sense for how pricing might look in 2003. It feels like just with CPI pricing rolling and timing of C&I increases you probably have five points of core price already in your back pocket entering 'twenty three but I'm wondering if you could.
Comment on that.
Well, you're absolutely right Jerry about the tailwind on those businesses that are that are driven by.
On the index type.
Increase.
The 12 month lagged and we've talked a lot about really starts to help us most significantly in the first quarter of next year.
So.
If we believe that CPI has gotten pretty close to the top here at nine 1%.
Then.
We would see pricing if let's just assume for the sake of discussion that that inflation starts to taper back down I think you would see pricing and those open market businesses.
Followed that down but not exactly I think we've kind of talked about it.
Compared to banks for example, where there spreads are better at lower rates and I think thats, what you would see with our pricing is that if inflation starts to really taper back down that you'd see a bigger percentage of our price go to margin improvement.
Not just cost recovery right now we're kind of in a.
A street fight you're trying to cover cost at nine 1% CPI.
And then with respect to your initial question, yes, when we get to really the first half of 2023 and recall that what we said about those index driven price decreases.
About 70% of that takes place in the first half of every year and 30% takes place in the second half of the year. So we will see some tailwind in the second half of 2022 from CPI, but it's just not as pronounced because only 30% of the revenue is getting it when we get to the first half of 2023.
When we get the real tailwind and resident that's primarily residential because those are that's the line of business that is most tied to an index.
Okay Super I appreciate the discussion thank you.
Thank you.
Our next question comes from Michael Hoffman of Stifel. Your line is open.
Jim I'd like to follow up on the price conversation because I think this is one of the most critical issues the industry has going for it.
So tackling what you just said in summarizing it.
Youre about 60, 40 open market versus index and I get the waiting first half second half, but if CPI goes to three youre still going to get a good spread to it call. It a 100 150 basis points in your open market and then Youre going to have your index that.
Something maybe closer to nine.
Just the algebra formula there is greater price in 'twenty three than I am in 'twenty, two before I factor in churn that's the math right.
I think youre spot on Michael I mean look.
We're not crazy about nine 1% inflation and as I said, we're doing everything we can with price and doing a good job with it but to cover our cost.
Placing comes back down to a more reasonable number let's call it 3% over the next.
Kind of two to three quarters that I think we have a greater percentage of our price that actually goes to margin improvement.
And not just focused on cost recovery, which is kind of where we are today.
With the open market pricing right.
I think Jimmy said.
Go ahead, John sorry.
I was just going to say Michael I think the one caveat to that is what we're specifically doing in residential and you can see that we continue to make progress on our core price side, the yield side, where we're still being pretty deliberate about what volume we're going to keep on what volume are knock on the cake that would be the one caveat.
Jim commented on.
Yes.
And I get that and I keep trying to convince the market, they're supposed to pay attention to price not volume because at the end of the day Youll have better quality business.
But the other part of the price question that keeps coming up and we try to help the market understand is how sticky unit prices are so the rate of change in open market might go from a seven core to our five core but the underlying unit prices are very very sticky price per yard prices.
Per ton price per pull.
Can we hope everybody appreciate the significance of that as well.
We consider our business to be very price inelastic and the reason is that it's such a small percentage of the customers overall cost structure. I mean, we've estimated it differs a little bit whether you're a residential customer versus a biz.
Business customer, but its probably half a percent.
Small businesses overall spend.
And then when you add to that what we're doing to truly differentiate ourselves those two things cause us a call.
Cause pricing to be pretty darn sticky for us. So you are right. It is.
We tend to hold onto more of it than maybe other businesses Mike right.
Alright, and my point being is.
If all of this unwind from inflationary standpoint or are there is a recession you don't walk back unit prices you hold onto the unit price plus.
I've got the favorable trend.
Higher price versus underlying internal cost inflation in 'twenty three power of that's pretty compelling.
Yes, that's right I mean, the unit price stays stays where it is and then it's just about the percentage, which is yield or core price. Those are percentage growth figures and we think that the percentage growth figure as I've said does does kind of taper down as inflation comes down, but the spread improves a bit so we have a little bit more.
It goes towards margin improvement at 3% CPI than we do at nine 1% CPO alright.
The room recycling upside of 35% to $45 million I'm, assuming that's mostly all weighted in the first half because.
The rins coming down recycling has come down sequentially.
No.
Okay.
The benefit of that has already been captured.
So I'll take that in two pieces, Michael on the recycling side of the business.
We're better than the first half about $28 million, we expect actually to get some of that up in the second half of the year. So we expect about $20 million to $25 million.
Earnings pressure in the second half just because of where commodity prices were in the second half of 'twenty, one relative to what we expect them to be in the second half of 'twenty two.
On the renewable energy side, we have captured $27 million in the first half of 'twenty, one 'twenty, two and we expect another $10 million to $20 million of incremental earnings in the back half. So when you net those two <unk>, we expect to be down in the call it $10 million to $15 million.
Okay. That's very helpful and then Devine on the guide at the beginning of the year.
Framed it is negative 100 basis points of headwind first half plus the 100 to 142nd half sort of zero to 40 up.
You were actually pretty close to the negative 100 little less actually but you are now telling us that's less than positive $101 40 in the second half if I'm revising part of the messaging that's the other part of it.
That's right, but what I would say is that plus $100 plus $1 49.
The other part of it.
That's right, but what I would say is that $100 plus 140, now looks more like call. It plus 82 plus 120.
And when you consider RFP impact of fuel at 60 basis points and that really does speak to the strength of the underlying fundamentals are solid waste and the incremental benefit at that renewable energy business relative to our initial expectations.
Fair enough and just to be clear that's 50 basis points is just a pass through math, it's not a real cost impacted you offset the cost increase with the.
The surcharge and it's just the pass through map.
Yeah, that's right from an earnings perspective, you'll really should be a zero sum game for us.
What we see on the fuel surcharge side revenue growth.
We had in Q1 or Q2, I'm, sorry, with $129 million we.
Similar levels, maybe a moderate decrease in the second half of the year on a quarter by quarter basis, but that effectively is a dollar for dollar offset of higher operating cost.
Our direct fuel and our indirect cost from subcontractor costs and the other transfer.
Elements of the business.
Okay, great. Thanks for taking the questions.
Thank you.
Our next question comes from Hamzah <unk> of Jefferies. Your line is open.
Thank you.
My first question is just maybe you could frame for us.
How this business you think will perform in a new recession.
I know the business is pretty resilient.
His store I know most companies are not senior downturn either yet.
The reason I asked that question is the sector is pretty different from all nine when volumes fell 10% and took a lot longer to recover and then most investors you're not going to have the colbert.
You're in front of them, where your internal revenue growth I guess it was negative 3% that was more of a shock to the system.
But just frame for us how your business is different.
We're clearly seeing pricing how the sector is more disciplined just frame for us your downturn playbook and resiliency of this business I know it also lags going into a downturn.
Thanks, Tom So you really kind of talk about it primarily volume right, but theres a couple of different components to your question here.
I'll tell you what gives us cause for optimism here, we knew that 99% of the focus on this call is going to be about.
Forward looking statements.
So a couple of things first of all I mentioned that on the price side.
To Michael's question, we have.
Very price elastic and elastic customer base, that's a real positive in terms of of the stickiness of price and price is one of the big three if I think of the big three being price volume and cost control.
Feel really good about price, if we think about ball a little bit and so just maybe a little bit of inside baseball here. We just had our our 16 area Vice presidents on for their quarterly reviews and almost to a person. They are feeling really optimistic about about their own individual areas and when we look at our July number.
In terms of volume.
They look pretty pretty good I mean, they look basically exactly like we saw in June .
You have to kind of consider that we had one less workday fourth of July . This year was on Monday last year was on Sunday, So so theres a little bit of.
We have to consider that and we also are on the commercial side considering things like we essentially she had a big.
National account that affected us by almost a percentage point, but if we factor those onetime things out volume still looks pretty good and the most forward looking.
Component of our volume is special waste.
Was up 19% for Q2, but as we look out towards what the pipeline is telling us and for the remainder of the year. It still looks really good our volume.
In the first three weeks of July looked good.
And in that special waste waste streams. So so that's two of the big three there.
And I would also tell you hamzah and to your question about why we're different from other industries I don't know that were different from other industries necessarily but our company. We do believe that we are starting to take some share. It's it's a tough operating market a really tough operating markets for a lot of companies John talked a bit about this later.
Her shortage and I don't think Thats, a short term trend that is a long term trend. That's why we've talked about kind of the third of the big three which is cost control and taking advantage of the attrition in our business.
The cost categories that we're looking at not back filling for half some of them have 50% turnover. So why why go through that answer wheel every single day, why not use technology to let some of those jobs a trend away.
<unk>.
And actually use that to our benefit and most.
Most other companies out there in our space just don't have that have the technology or the wherewithal. So so some of this.
Ultimately makes us look better even in a recessionary environment is that we feel good about taking share.
In a tough operating climate.
Got it.
Very very helpful and just you had flagged.
And above normal M&A, you're I know, it's still sort of 300 $400 million.
Figure.
But just maybe frame for us.
Whats driving that how long do you think an above normal M&A environment could last and any change in valuations youre seeing in the private market.
Yes.
<unk> talked about the fact that it is a bit of a tough operating environment out there for a lot of companies and so what we don't want to do and we've said this on several of our previous calls.
We don't want to bail somebody have a problem I mean, we are still going to be conservative when it comes to evaluations.
But we think there is some really good companies out there that.
That are not asking for ridiculous.
Ridiculous prices purchase prices and those are attractive to us and we see enough of those to say that that's in the solid waste space and in the recycling space.
We feel more like a $3 million to $400 million year versus.
More of our traditional 100 to 200 is appropriate.
Got it just a clarification question I'll turn it over just for Davina.
Yes, I think you heard slide 129 million.
After the $153 million, that's fuel surcharge recovery in Q2.
Just comparing that number did.
Did you mentioned sort of how much fuel increased for you when we're looking at that one 9 million number.
Where did your cost increase where fuel just comparing the 129 was there to over 100 million or less than 100 billion just any sense. There. Thank you.
It was effectively equal so it's a combination of direct and indirect.
The indirect will show up in lines like the subcontractor category. So you can think of it as effectively like a dollar for dollar offset.
Got it thank you.
Yeah.
Thank you. Our next question comes from Sean Eastman.
A key bank capital markets and nice update here, thanks for taking my questions.
I just wanted to come back to inflation last quarter, you guys quoted I think around 9% I'm wondering what that was in the second quarter.
This dynamic around Comping, the heavy wage increases.
Last year. It was interesting how we think about how that.
Part of the inflation algorithm trends into the second half.
But what else should we be aware of in terms of what's happening under the hood in terms of inflation I mean outside of wages are things still ramping cooling off.
Any color on that element would be helpful.
Yes, Sean I think.
Commentary, our labor, we got out in front of it last year and we see while it's not going all the way down it's going to moderate in the back half of the year because of the intentional steps. We took last year, giving you touched on it but we're still seeing inflationary pressure on third party on maintenance or repair subcontractors. This one that sticks out and clearly whether it's by rail or by.
We're seeing the fuel impact there as well that's a big chunk of the indirect pressure.
Pressure, we're seeing and I think the commodity piece runs through that a little bit as well.
When you think about third party maintenance repairs is a commodity element to that so I would tell you that I feel like it's Pete.
Generally speaking and I think the benefit we'll see.
In terms of what we did with our labor, which is a big which is a big chunk of our operating expense line.
Thanks, Sean.
Davita touched on in her remarks, but the supply chain itself I mean, she mentioned that we're seeing a little bit of easing there and that is true, but that's pretty important to us, particularly as you think about.
The delivery of trucks to us I mean last year, we didn't get the trucks that we ordered and so far this year, we have not gotten the number that we expected.
We're hopeful that in the back half of the year, we start to see.
Pretty significant ramp up there in the vehicles that we've ordered that that's a pretty important part of <unk>.
The inflation picture because as John mentioned maintenance cost is not an insignificant cost line items and then obviously as <unk>.
<unk> as you are having to keep.
Older trucks in our fleet.
Okay, that's interesting and kind of a segue into my next question I think in their prepared remarks, you guys had mentioned that capital spending is running a little below expectations in the first half maybe you would revisit that guidance next quarter.
Is it really just trucks, we're talking about here I wondered if some of these capital spending delays also.
Are being seen around the sustainability investment program.
If there is any risk to that incremental EBITDA, we're expecting to see roll out of those investments into next year.
Yes, great question Sean.
First and foremost I would say it's important to hear the message that we are very confident with the rollout of our sustainability initiatives and those investments are on track.
<unk> talked about.
And I think that's already and the recycling facility coming online and expectations for the remainder of the year there.
<unk> continued to be strong relative to our initial expectation. So when we look at capital being below our guided level that really is more in the traditional solid waste space.
And specifically for trucks as Jim just mentioned our track deliveries in 2022 has has really been slow relative to our initial expectations and even after we saw Q1 unfold.
Those expectations and they are still below what we had.
Expected at that point in time, so as we look at how we spend our capital we're adapting for that slowdown on the truck front and we're looking at places across the rest of our business to proactively pulled forward capital.
In the landfill line of business, where we've seen strong volumes, particularly in special waste or as we look at other parts of the business that are performing well and have continued investment opportunities because the returns have been strong. So overall, what I would tell you is we still need to uninstall software. We can give you additional detail on.
On the traditional capital part.
I would tell you at this point, we completely expect to stand firm on the sustainability capital at about $550 million for the year.
Understood. Thanks, guys I'll turn it over there.
Thank you.
Our next question comes from Noah Kaye Oppenheimer. Your line is open.
And actually that last question really feeds into what I wanted to ask about which is the medium to longer term planning for some of the investments.
Jim and John you've talked about in terms of ramping up Asl percentage within the fleet.
Of course, the recycling automation, but just generally.
These investments that are helping to reduce your labor intensity can you kind of outline for US you talked about where you want to be in for years, how should we think about maybe the next couple of years.
You put some of these supply chain constraints are behind us, but can you just talk maybe about.
<unk> thousand 448 months.
At 12 months to 24 month type expectation for where you think you can get to.
So I think that what Youre talking about your question is really around is.
Is it where do we expect to be with respect to capital or is it about what we think the impact will be on operating standpoint by by not back filling some of these roles.
Yes. Thanks.
It's both right because we understand that.
One will follow the other.
Okay.
Let's talk about the capital piece first.
And if I, just think about kind of the big buckets around where I talked about $5 to 7000 physicians that we wouldnt refill the big buckets as John mentioned shifting from a rear load truck to an Asl truck.
There is about.
When you think about in a rear load being maybe maybe a.
280, $300000 truck and ourselves maybe $100000 more so so there is some additional capital going to an Asl, but really if you think about that that pays itself off almost in one year's time, because youre, taking a helper off the back.
And you are picking up a pretty significant chunk of productivity there.
We've done this many times moving from reload to yourselves and the pickup in efficiencies of about 15%.
And then you take a helper off the back of the all in costs. There are a lot of those are actually Tim flavors. So we're paying attempt firm might be 75 to $100000. All in for that first on the back of the truck. So it pays itself back almost in a year's time that's bucket. One. So there is some additional capex for the truck.
But the Opex goes away pretty fast if we think about another buckets, we've talked a lot about recycling and we've said kind of somewhere in the neighborhood of 1200 positions there as we and I mentioned in my in my prepared remarks that we've seen 30% reduction in labor cost at those first five.
That we've done and we think it's anywhere between 30% to 50%.
Reduction so.
One of the plants that we.
Rebuilt was in Salt Lake City that would actually was closer to 50% reduction in labor. So it's a range of how much labor comes out.
And capital is already accounted for we've already talked about.
The.
$800 million ish over a period of four years, that's in that number and then we also in recycling.
Guests at improved quality of the material at the backend of the plant and that doesn't show up and that shows up in top line revenue.
Salt Lake is an example that previously before we rebuilt the plant they were having to sell other mixed paper is a low grade paper now theyre able to separate it and they have a pretty big component of hybrid paper that obviously comes at a higher price.
The only thing I would add John I think it will set us we're taking a kind of a total cost of operation view residential has a good view of that between capital and Opex and I would tell you.
The other thing that's happening is when we started down this path a few years ago recycling and residential are two good examples of kind of the calculus, we were doing that in this labor inflationary environment <unk> those investments are getting better as we go along as Jim mentioned I don't think any of US think this labor shortage or the labor wage pressure's going to abate anytime soon.
So as we continue with the best these these pro forma actually look better as time goes on.
Yes.
To complete the answer there.
And good color John Thank you.
What do we expect this impact to be I mean look put put a number on whatever numbers you want on those $5 to 7000 positions.
Don't get refills.
The good news is that this is not your traditional okay, we're going to.
10% of the workforce that's not at all what this is this is a very strategic approach to reducing our labor dependency by taking advantage of these very high turnover numbers and some of these jobs and so the cost the exit cost as is very low the capital.
Cost is largely accounted for.
And in the operating improvements.
Whether it's SG&A or operating cost if it's 5000 jobs.
Put a number on that.
50 to $100 per.
It's a big it's a material impact to opex and to SG&A.
Higher end of that job range 7000.
Then.
It becomes even better.
Yeah, that's great color. Thank you just wanted to get a little bit of color as well on the M&A pipeline.
And good to see it coming back in greater portion of the market, but it is primarily traditional solid waste recycling can you give us a sense of the mix in terms of where you're seeing opportunities.
It's a little bit of both I mean, we kind of consider we consider recycling to be traditional solid waste, but it's a bit of both.
We announced the continuous investments.
Last quarter or a couple of quarters ago.
Which is taking low value.
<unk> six that we weren't getting paid a lot for and some of those mixed papers that I mentioned that.
That are better low value as well and combining them in making a roofing material and so there is there is a little bit of both in this how do we how do we take material that is for example, coming into the landfill today that really doesn't it doesn't add a lot of value that maybe his line I mean, if I'm thinking about plastics plastics are very light.
But plastics are also very recyclable and so.
We're already doing everything we can with things like Pega hte going through a traditional single stream are there other things, we can do with plastics that come into the landfill taking them out of the landfill where it doesn't.
Compose for 700 years or something and doing something that's both environmentally and economically favorable to the existing.
To the existing model and then Youre right. The other piece is just very traditional solid waste acquisitions.
<unk> that where we may have.
Kind of a hole in our network or we've got something.
It feels like it's it would be additive it makes a lot of sense for us at a reasonable valuation.
Thank you so much.
Yes.
Thank you.
Our next question comes from Walter Sparkman.
RBC Your line is open.
So I would like to.
To keep on the M&A front, you're doing two to three times. This year, what you would do in a normal year.
When you look at the addressable market.
For for acquisitions.
And look at what's not held by the majors.
Do you see that entire market as being in your in your sites or.
Would you consider some some lower portion of that is being where you would.
You would focus your attention over the coming and I'm not saying this over the coming.
510 years in scope.
Yes, I guess thankfully we're talking.
Geography, we're a north American company. So we really haven't looked outside of North America for a big for any type of solid waste acquisition, obviously that doesn't meet the definition of a tuck in any way because we don't have operations overseas So within North America.
When we look at these acquisitions, we're always looking.
And where it makes the most sense strategically for us.
And where we can branches by the way. It also is part of what.
Why we're excited about this.
This.
Reduction in labor dependency and enables us if we believe that our competition can't do the same thing that they are not able to to use technology to reduce their labor dependency then it gives us the ability to bring more synergies to the table when we acquire.
Our company. So I think we're if everything would be on the table within North America.
And then of course, if it requires.
A filing of some type and we will we will.
Have just us look at it but we always feel like we want to be conservative on valuations and Thats, maybe the single most important pieces does it meet our strategic goals and is it valued properly.
I guess it not only does it bring in more synergies, but also makes it harder for those mom and pops to compete with you and perhaps drive more to you given that they can't match. Your technological investment does that is that fair to say.
Yeah look I mean.
I don't think it's against the rules say that.
Thats.
<unk> tried to reduce our cost structure is something thats very important to us and to the extent that somebody else can do that.
There probably will not ours, but it does present an opportunity. It's why we're seeing a pretty robust pipeline here I think there's a lot of companies out there.
Not going to I don't want to be an HR coordinator 24, seven and I don't want to make the investments in technology to try and do the same thing that wm's doing so so I'll turn around and sell to them at a reasonable valuation and thats. Okay.
It makes sense.
As we.
As the market kind of gets acquired by yourselves and your and the larger majors.
No.
Talked a little bit about the potential for going a little further afield and possibly in the hazardous and.
Is that still still an option for you.
Could you go even further I mean.
We always worry a little bit about about getting beyond our core competencies. So just curious here your view on what is an addressable market for waste management outside of.
Solid or even outside of hazardous waste.
No I think we're kind of staying away from just strictly kind of a services type business and yes. There are some some.
Some ancillary.
Businesses that might.
It might be interesting to us but at this point there is as we've talked about theres such a nice.
Our robust pipeline of just traditional solid waste.
So we feel like we can focus there and then add to that a little bit of the recycling type businesses.
I mentioned earlier and that should it should take up all of our time.
Okay. That's great color appreciate the time.
Thank you.
Our next question comes from David Manthey of Baird. Your line is open.
One moment.
Okay.
Ross David on the screen.
It looks like our next question is going to come from Michael Feniger.
Your line is open.
One moment please.
Yes.
Okay.
Yeah.
A good job of answering the question.
One moment.
Yeah.
Just to call.
<unk>.
Okay.
Davidson.
They've just disappeared in the queue.
Okay, one moment please.
Yeah.
Yeah.
Okay.
Yes.
Our next question comes from Kevin Chang Your line is open.
Alright can you can you hear me.
Yes, Sir your line is.
Thats perfect their tons retirement I guess.
Congrats on a good quarter, maybe just a couple of quick ones for me.
It sounds like Youre feeling.
Kind of moving past peak inflation here.
How long it'll take to get back.
To normal inflation.
Obviously, you've been pricing to offset inflation dollars, but what I'm wondering is there.
There been a push to talk.
More of that inflation will be a core price versus.
Versus using a surcharge program.
I presume and correct me if I'm wrong.
You can kind of tapped to more of that inflation through the core price and just as a kind of a stickier.
As inflation starts to rollover.
CPI just to come down here.
I think it's.
Think I heard you right there, but it's a little bit of a combination of the two I mean theres some surcharges there.
Really we don't capture fuel in our.
In our core price or our yield numbers truly.
Truly is designed to just be a pass through.
For us we do have an environmental fee.
That environmental fee does get captured.
And our price figures, but if that was your question. It's a combination of.
Core price increases.
And then also.
The second component of that which is holding on to those price increases and Thats why theres always a little bit of a given taken pricing and thats been.
The model as long as I've been with the company as long as we've been in existence I think so holding on to.
It gives me a higher percentage of those price increases as an important component.
That's helpful.
That's exactly right.
We're looking for and then just last one for me.
You were talking about some of these.
<unk> pricing index contracts, we've talked about this 12 month lag.
Some of the other industries that cover just given how.
Our food inflation has been there's been a push to.
Shrink I guess that timeline between when they start seeing that acute pressure to win when when they can start repricing for it or is that getting compensated has there been any push on your rental.
You can be sure that lag has there been any desire from your customers' perspective to shrink that lag liquids given maybe some of the industry.
Yes, I think residential is probably a great example of that if you look at what our core price and yield results have tracked at the last six to eight maybe even 10 quarters. It certainly outpaced up until last couple of quarters. What CPI has been that's not the case the last handful of quarters, which kind of shows you Kevin what we're doing.
On the on the pricing side to find to strike the right balance between what we're seeing in our contracted rate escalators, what we're willing to accept going forward. So I think the most encouraging thing is when you look at that residential line of business Thats, probably the best example of that index, we've outpaced what CPI as Ben said the exception is the last.
Couple of quarters, and we are also in terms of.
We don't want to necessarily shed the volume, but we want to be profitable and when you look at the volume tradeoffs, we did at what's happening on the price that youre seeing that strategy play out again in this quarter as well and just just one last point that 12 month lag that you talked about is really contractual with these big municipalities. So.
There's not really an option for us to change that unless they choose to change their bid specs.
Okay.
Helpful color, Thanks, again, and congrats on a good quarter.
Thank you.
Thank you. Our next question comes from Michael Feniger of Bank of America. Your line is open.
Apologies about that.
My main question I know, we're up on the hour. Jim is your margin is going to finish this year 2008, 1% five years ago.
Eight three so it's basically been kind of range bound yet now you have.
Very profitable sustainability business with renewables Youre pricing is very strong in Q2 does it feel like 2023 is when this margin range really breaks out 50 basis points or higher just based on where this business is today compared to where it was five years ago.
Yes.
Yes, I think there was a there's been a couple of things that have happened.
As we've as we've kind of shot for this aspirational number of 30% or whatever it is obviously aes had an impact on margin that business was more like.
Kind of a 24% margin business. When we were 28. So so digesting that has had an impact on margin, but look it's been a great acquisition for US and then all of a sudden we kind of finished digesting avs and then we get this big headwind from fuel and Divina did a nice job of talking about the fact that it's it's really.
It's margin disruptive, but it is not earning its destructive it's designed to be.
Excuse me neutral from a from an EBITDA standpoint, but it does hurt us on the margin line. So to the extent that you see a couple of things going on one is you could you see us.
Continuing to raise the avs business up to our level of kind.
Kind of margin that will help us as you see if you will come back down nothing.
Nothing that we're really doing there to affect margin, but it does have a positive impact on us and then the other thing that we've talked a lot about it.
Is two other things one is we talked about pricing.
Right now basically covering cost in <unk> and.
And starting to as you see inflation coming down a bigger component of price goes to goes to margin accretion. So that's number one and then number two is this whole cost piece as we take permanently take cost out of the organization and become less labor dependent that definitely has.
Impact on margin. So all of that gives me reason for optimism that as we think about 'twenty three and beyond.
Then we will really see margin improvement.
And the overall business.
Sam I think it's fantastic.
We would emphasize Michael in terms of looking at the total company margin over that five year period. In addition to what Jim outlined specifically for commodity based impact and the Aes acquisition is that when you think about the investment we're making in technology, it's showing up in our SG&A in a different way.
And it would have had we effectively decided to have SG&A dollars be around the business model and so what you see from us is.
Is that we havent different level of SG&A than we otherwise would have if we weren't making strategic investments that will provide significant returns over the long term and so I really do think that you have to consider that aspect of how we have strategically.
What changed over the last five years in terms of thinking about how our margins had adopted in that period.
Thank you that was helpful to give us context of how to think about it over the five year strategy and just lastly, Jim I mean, what do you think is the.
Right level of CPI for the business what is the sweet spot, because obviously CPI of 1% or like that decade, clearly doesn't feel like that's a great place for.
For the industry or for your operation now CPI CPI at 9%. That's another story is there a sweet spot that you feel like is the right number where it helps you get good pricing resets on those contracts that you guys can also handle the cost inflation on the business.
In terms of also getting productivity savings every year, what would be that that CPI sweet spot for the business you think.
I mean, it's a good question I'm not sure I know what the right number is I can tell you. The raw number is nine one so.
Don't know, where we have talked about the fact that as we see inflation drop off and I compared it to the banks.
Banks, probably try and do that math as well where is the sweet spot for me in terms of rates.
And I don't know where the sweet spot is on CPI.
Might be 2% or 3%, but if I had to kind of pick a number.
But I don't know for sure and we haven't really done the math, but there was no reason to do the math until a year and a half ago because it's been the same.
<unk> been sub 2% for for most of my career, but but now there is a reason to try to answer that question and we will do a bit of work product.
Thanks, everyone.
Thank you.
Our next question comes from Toni Kaplan from Morgan Stanley . Your line is open.
The macro question.
Not seeing a slowdown within the business at this point despite maybe some increased caution on the macro environment in general but are there any pillar <unk>.
Industries within commercial for example that are just being a little bit more cautious than the conversations have changed a little bit.
Well Youre right, Tony I mean, there's a ton of speculation out there about what this.
When does the recession hit how deep is the recession, how long is that.
The good news for US is that we.
<unk>.
A pretty.
I mentioned, 75% of our business is pretty resilient.
Two a downturn so we perform well in any environment.
We've talked a lot about special waste the last couple of quarters.
And.
Most of our revenue is kind of.
More of a lagging indicator, but special waste is.
Is the one.
Leading indicators, we have maybe a couple of leading indicators one might be our construction and demolition, but as John said, it's a small part of our business special waste is leading.
Because it's largely industrial type jobs and those industrial companies have some discretion as to when they spend a lot of those dollars and we're not seeing them turn that off so.
Our special waste was very strong for Q1. It was very strong for Q2, and we continue to be optimistic about special waste, even when we look at our numbers in the month of July .
We still are seeing very positive comparisons in special waste.
No.
As I think about the macro economy overall I do think there is a recession coming I am not going to kind of Buck the trend there because everybody is saying, there's one coming but I just feel like we're in a in a great industry too.
So whether the storm it ultimately.
Some of the things, we're doing with technology and reducing our labor dependency come out of this thing better than anybody else.
That's good and then just as a follow up.
Wrong result.
And the outlook, obviously raised there.
Wondering if you could talk maybe one.
Commercial and industrial pricing this quarter shown at Green just how are you about pricing commercial industrial landfill.
As the year goes on thank you.
So specific to landfill pricing in landfill pricing has been a focus area for us for probably three or four years for us It was very good.
In Q2, and then Q1, so we're pleased with the fact that we're able to to put.
Landfill pricing through.
You are asking kind of more specifically around commercial and industrial pricing.
Commercial and industrial pricing has been excellent as well I would tell you that pricing really across the board I can't find a weak spot in terms of how we're performing on the price front, whether its residential or commercial industrial landfill.
Everybody seems to be able to put price through I think part of that is that the customer is watching they are watching these these.
Business shows on TV as well and they know inflation is out there. They know it's real and because it's a small because our business is a small percentage of their overall spend.
They are willing to take the price increases.
Super helpful. Thank you.
Thank you.
I'm showing no further questions at this time I'd like to turn the call back over to Joseph <unk>, President and CEO for closing remarks.
So thanks for joining us today.
Quickly to conclude.
<unk>.
At a time when there's so many questions about.
The outlook from a macro standpoint, we are we're really proud to be somewhat of a symbol of stability.
And strength to our investors.
We stressed today that that's the short term outlook looks good for <unk>.
Maybe more importantly, we're very excited about and confident in the long term outlook for long term strategy is playing out just as we have expected just as we as we communicated way back in 2019 at our Investor Day, and we expect that to play out through not only the end of 'twenty two 'twenty three 'twenty four.
So thanks again, everyone for joining us this morning, and we will talk to you next quarter.
Thank you ladies this does conclude today's conference you may all disconnect have a great day.
The conference will begin shortly.
To raise Johan during Q&A, you can dial one one.
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