Q3 2022 Waste Management Inc Earnings Call
Okay.
Good day and thank you for standby welcome to the W. M third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one one on your telephone please.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Ed Eckel Senior director of Investor Relations. Please go ahead.
Thank you Catherine.
Everyone. Thank you for joining us for our third quarter together, that's why two earnings conference call.
This morning, Jim Fish, President and Chief Executive Officer, John Morris Executive Vice President and Chief operating Officer.
Okay.
Financial Officer.
In your prepared comments from each of them today.
A couple of high level financials and provide a strategic.
I will cover it all.
Okay.
Charles.
We'll get started.
8-K, this morning that cause the earnings press release.
Yeah.
The form 8-K, the press release schedules to the press release include important information.
During the call.
The statements, which are based on current expectations projections or opinions about future periods.
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.
Our most recent Form 10-K.
Rob will discuss our results.
And volume, which unless stated otherwise specifically.
Total revenue for <unk>.
Got it.
During the call John at the beautiful discuss operating EBITDA, which is a couple of operations before depreciation and amortization.
I think comparison, unless otherwise stated will be with third quarter of 2021.
Income EPS operating EBITDA margin.
Results have been adjusted.
To enhance comparability by excluding certain items that accurately.
Fundamental physical ball, that's what we're talking about.
Operations.
So definitely better or just your free cash flow.
So that's like a tables.
Sorry.
Wm com for reconciliations for the most comparable GAAP measures.
Sure.
Yeah.
Projections.
This call is being recorded and will be available.
Eastern time today.
A replay of the call.
Right.
Any redistribution resetting mentioned or rebroadcast let's call in any form without the express written cause I W. M is prohibited now I'll turn the call over to Wm's, President and CEO jellyfish.
<unk> and thank you all for joining us.
Our team delivered strong results in the third quarter growing adjusted operating EBITDA by 11% compared to last year.
Yep, a pharmacy, driven by the strength and resiliency of our collection and disposal business.
In a corner, where the preponderance of macroeconomic discussion has centered around signs of a slowing economy W. As collection and disposal operating EBITDA grew by more than 12%.
Margins expanded 60 basis points.
Question and disposal or grant organic revenue growth was 8.8%.
Emanating quarterly total revenue.
He ran into about $5 billion for the second consecutive quarter.
The growth was delivered.
To go with it.
Excuse me, but the growth we delivered was driven by delivered steps.
To grow revenue and efficiently manage costs.
Which do you have a position us to overcome inflationary pressures.
A solid resolved through the first nine months of the year, because you should as well to achieve the updated guidance provided last quarter, even with a recent downturn in recycling commodity prices.
Important contributors you are approving trained in operating expenses and overall cost structure is the strategic decided to leverage throw automation, the tight labor market and high interest.
Jahmal touch on there since he discusses are significantly improves turnover in more detail.
By the end of 2022, we will have reached almost a thousand full time positions.
Difficult to source job categories that we've chosen not to refill.
Well on our way to reducing our labor dependency by five to 7000 jobs.
We're pleased to see early benefits from our investments to reduce our cost to serve while also differentiating W. M by enhancing the customer experience.
Continuing on this discussion about 2023 and beyond strategy, we're very pleased with our investments for banking and both renewable natural gas and recycling business.
R. G. We continue to make great progress on building out our new plans is reached by 2023 to be the heaviest capital investment here.
We're on track to see meaningful earnings contributions.
From 2022, and 2023 investments and 2024.
With full incremental EBITDA contributions coming of 2026, which are conservatively estimated at $400 million.
Recycling business.
Not only provides an important service that our customers want to me.
It continues to be a profitable.
Business generating solid returns.
We worked hard to trust our business model over the last several years and I saw the results of that in the third quarter, particularly in our automated facilities.
Our five fully automated merce are now delivering differentiated results relative to our single Street network with about 30 per cent lower labor costs 13 per cent lower total operating costs.
Nearly double the operating EBITDA margin and most importantly, a 40 per cent improvement in to the safety metrics.
Bronchi to complete for automation projects and add one humor in 2022.
The significant investments that we're making and growing in automating on <unk> network are strengthening of the business by reducing costs increase.
Increasing throughput and improving product quality.
That's what our Orangy investments 2023 will be the happiest to your capital spending.
In the rebuilding of our <unk> with the biggest increase in incremental earnings coming in 2024 2025.
As the majority of the rebuild at numerous come online.
Additionally, as part of our commitment to growing our recycling business, we announced that we.
Acquiring a controlling interest in <unk> innovative U S business.
The plan of acquisition, Google or plastics recycling capabilities by delivering circular solutions for films and clear plastic route used commercially.
We expect to receive investment returns comparable to our recycling automation investments.
A more prolonged horizon given the operations are in the early stages of scaling.
<unk> plan to provide a more detailed update during our foreign current lines call once the deal closes.
Also on the M&A, probably completed more than $200 million of acquisitions in the third quarter.
Having a swell on our way to our full your expectation of 300 and $400 million.
Close to nicely sized solid waste tuck in acquisitions in Indiana in Arizona during the court.
He's acquisitions are a complement to our existing operations.
We expect to generate a solid returns and earnings contribution in 2023.
And finally I'm pleased to share.
But earlier this month, we reduced we release, our 20 twenty-two sustainability report.
Providing details on R. E S T performance and outlining our new 2030 priorities. These new priorities are strongly linked with our overall company strategy.
And directly support expansion of our recycling admirable energy business.
Even as we celebrated continued progress.
And our sustainability journey were already focused on driving improvements in the future and closing I want to thank the entire W. M team for their hard work and dedication.
We're focused on finishing 2022 strong.
Continuing to progress our investments and recycling or no one energy and automation to drive growth I'll now turn the call over to Jon's discuss our operational results for the court.
Thanks to you and good morning.
Except you organic revenue growth continue to be a key contribute towards stronger as well as in the third quarter with my collection and disposal you 7.1%.
Last four price depressed every line of business linked to third quarter for price of 8.2% of 70 basis points from the second quarter.
We continue to prioritise customer lifetime value their pricing strategies, and we maintain bird who return of 8.7% when adjusted for steps. We took two essentially she had three large unprofitable contracts.
We remain focused on discipline pricing in the fourth quarter physician us to achieve our full year revenue growth guidance about 10%.
And the third cooler <unk> healthy level says, we're just a collection and disposal disposable item grew by 1.7%, including special recently I agree with with nearly 15%.
<unk> adjusted for the contract loss as I mentioned was 1.4%.
We continue to grow volumes as her team's focus on differentiating W. M as a preferred service provider.
In addition, our teams in Florida, Verizon to the challenges from Hurricane Ian taken care of your teammates and communities.
We're increased cost per business disruption in property losses in the quarter related to the hurricane well positioned to handle store in volume is clean up activities ramp up for school.
We remain focused on controlling up raincoats adjusted operating expenses were 62.2% of revenue in the third quarter New line with prior year.
While we're still see high single digit inflation operating expenses as a percentage of <unk> 70 basis points compared to last year.
Last year, we made significant investments in our people, including proactive wage adjustments and approved benefit package and the pre screening those investments are paying off his driver turnover <unk> 400 basis points in the past three months and sequentially the rate of increase in labor costs improve more than 400 <unk>.
We need to repair costs for the elevated intervene impacted by a slowdown in truck deliveries tight labor market for technicians and higher cost per parts of <unk> services.
The impact of higher fuel costs increase operating expenses as a percentage of revenue by 50 basis points.
This increase was completely all set by the alternative fuel tax credits realized in the third quarter related to the first half of 2022.
Well cost inflation fears to meet using the inflationary environment only serves to reinforce her commitment to using technology and automation to reduce our labor dependency across the business.
Cough syrup.
As Jim distress, we continue to have strong conviction recycling business.
Markets drive the value of recycled commodities the steps we've taken over the past few years to shift and 95 per cent of our third party lines to a fee for service model provides protection on the downside.
So while there is a level of already variability recycling business is profitable and generate solid returns in any economic environment.
Are blended average commodity right in the third quarter was about $94 per ton, we are assuming a blended commodity value of about $50 per ton for the fourth quarter of 2022, which compares to $132 and the <unk> of 2021. These recent.
Recent commodity market moves combined with persisting cost inflation are expected to be about a 50 million dollar a year over your headwinds operating.
Fourth quarter.
We're very focused not only managing costs and recycling, causing the recycling business, but also investing in.
Elimination across a roof network to structurally lower the cost of process material and you better quality, which further enhances the protections of 40 by our fee for service model won't providing profitability lift even in the toughest mortgage.
Renewable energy business, we continue to some strong performance with operating EBIDTA first nine months growing $24 million. The second of our 17, you Orangy points announced at the beginning of the Europe is on track for completion at the end of the year and is expected to begin.
Generating revenue in the third quarter.
<unk> E P. A certification to generate wrench credits.
In closing we are very pleased with our third quarter results and we continue to operate our business with notable focus on discipline cost control.
And responsible revenue quality improvements I want to thank the entire W. N team for their invaluable contributions to our to our success.
Now turn the call over to Davina discuss our financial results in further detail.
<unk> good morning every line.
Oh, Yeah, I team delivered starting with ultimate third quarter, Kevin buying organic rattling your grass <unk> to automate the business.
It continued to see improvement in that collection.
Strategic I'm sponsoring.
Sponsoring named people first culture and investing in automation are driving very tangible results.
Adjusted operating EBITDA collapsing into several business grew 170 $490 in a corner, which contributed to Cuddle company operating EBIT margin make Samsung a 50 basis point 28.6 per cent.
And the collection.
<unk> <unk> 128 at this point I'm pregnant.
Operating EBITDA imagine the author benefited 50 basis points and the passage of the information like that snaps, let's secured alternative fuel tax credit 320, 20th boy.
Thank you.
50 basis points relates to the catch up a gas mask. He made in a corner can recognize the benefits of these credit for the first half of 220 camp.
Partially offsetting is very strong like that also I had waited 50 basis points from recycling commodity prices.
30 basis points than the impact of higher fuel costs.
20 basis points kind of increased technology and automation on that plan.
20 basis points for the damage to some advice facilities and via phone caused by hurricane.
Proactive management and I've seen that it continues to be an important element of our business authentication accurate.
And the third quarter at Gmail with 9.2 per cent of grabbing ma'am.
50 basis 0.9.
For the same period in 2021.
First nine months of the year S. D N a with 9.6 per cent of the Avenue.
<unk> with a four year outlet provided last quarter.
Here's a day Cashbook I'm operation to increased more than 4% driven by operating and EBITDA.
10%.
<unk> grabbed the <unk> operating it gets accurate with a higher gas taxes.
Next payment.
<unk> benefits been alternative heal tax credit.
Moderation in working capital of benefits from last year, when we saw significant benefits and I need to paint that's M.
Okay. The first nine months of the year capital expenditures of <unk> $725 million.
With just over $1.4 billion that that related to normal capital.
And the remaining 322 $90 related to the strategic.
Cycling anywhere near while I know deep isn't that bad.
As I mentioned in July we we're starting to see some encouraging signs of improvement no check the library and one gaining traction.
That's my project.
Early indicators continue throughout the third quarter and I'm pleased with the increased pace of capital investment that actually <unk>.
We currently expect a six dollar a good rate of capital to continue.
Cause they can I ask to finish the year plan for capital expenditures.
Turning to our 2022 outlet.
Solid operational performance in the first nine months of the year physicians up to achieve the guidance, we provided last quarter.
Continue to expect revenue of approximately 10% and adjusted operating EBITDA within the range of 5.5 to 5.6, $7, which represents an operating EBITDA Morgan at 28.1% and one point.
Alright number format ketchup on track to achieve our free Cashwell, a diagnosed upgraded nine $2.15 billion.
And the fourth quarter, we know anticipate making an additional cash tax payment at about $190 related to a 2017.
Littering the payment.
2022, free cash flow and between 2.05 and $2.15 billion.
When we call all of them together replace a report about that meet or exceed expectations across all key financial magic.
Combining that strong performance with a stability and certainty appointed by a healthy balance sheet.
With confidence in our ability to deliver on strategic priority fairly certain economic backdrop.
At the end of the quarter, a leverage ratio with 2.65 times, the 19% about that portfolio had variable rate.
In conclusion, we are very.
<unk>, what the company's performance in 2022.
Strong conviction that the investments we are making <unk> ability businesses, and then E as in technology and automation to optimize our business.
So can you check that.
The team remains hard at work on delivering a strong finish to the year.
A solid foundation for 2023.
<unk> on the line for a question.
Thank you as a reminder to ask a question you'll need the press star one one on your telephone please spam by while we compile the Q&A roster.
Our first question comes from Tyler Brown with Raymond James Your line is open.
Good morning.
Alright.
<unk> just to start I know you guys mentioned that you broadly maintain the guidance for the full year I think that included the EBITDA five five to five six but obviously, that's a pretty big range with one quarter left and then we've got a lot of movement in commodities. We've got a week Canadian dollar are we kind of tracking more towards the low end of that range, if they need help with.
B I appreciate it used to kind of tighten up that range.
I think we're I think we're trying to still around the mid point Tyler I mean, it is a fairly broad range of 100 million, but but we we feel pretty comfortable about the mid point some of it obviously depends on what happens in Florida, but but.
Yeah for the for the year, there's gonna be a little bit of a a little bit of a positive <unk>. Okay actually I was just a little bit of a negative.
We were 20 million cost for Q3, and Q4 combines really expecting it to be.
And and so right now or estimating kind of a 50 million dollar benefit that will change and so that's gonna help determine where we finished with him at 5.5 to 516, but.
So so I'd say, it's a little bit of a negative.
<unk> is based on what we know today, but that number will certainly change and so that that's why we're taking the the middle of the range is is.
<unk>.
Okay, Great. That's that's very helpful. And then you know I know it's it's.
Maybe a little too early to give too much but when we start thinking about some of the puts and takes on free cash flow next to your number one can you just kind of remind us what you're floating that mixes and at current rates is that a headwind to how do we think about cash taxes in light of this hundred million dollar payment and three well some of the incentive comp bonuses be paid.
Will that be a headwind or a tailwind as we think about 23.
Yeah, and the Great question, Tyler and I can have an order to frame it the right way.
How we finished 2022 and 2022 has been a fantastic free cachepot ear for us and and really we start that and look at it meant importantly, an EBITDA strength when I look at what we expect it for the year, we were expecting a three to 490 dollar increase in EBITDA year over year basis.
And we're gonna knock that out of the park and cast a year, we've already achieved $371 million in EBITDA directly nine months and so when you think of the fact that we should deliver another $100 million to $200 million that.
In the fourth quarter of it really got to speak to the strength of the year.
When we look at the headwinds, though for a year ahead. It really is what's creating a little bit of noise in 2022 free cash while I'm interested in taxes bleeding away, but there is.
As well on the interest and taxes line, we now expect a head when you're on a year over year basis at about $259.
Darn it expecting that headwind to be $75 million to $125 million and when I look ahead, the fourth quarter payment I mentioned relating to the 2017 matter really doesn't do anything to change the trend of cash taxes trying to cash taxes will be impacted.
The step change any bonus depreciation said there is at 20 per cent reduction in the amount of benefits depreciation on your head that will create seven sort of impact I haven't yet quantify that will give you more color on that and in the fourth quarter.
On the other hand will be more significant as I mentioned in my prepared remarks about 20 per cent of our dad sledding right. When I look at that combined with the rate resets I'm maturing that you've got about $2.2 billion that aren't that balance is.
That will be exposed to sunlight reset in the next 12 months. We're currently projecting that can be about 100 million dollar headwinds in your head more color cause candidly that number has changed very dramatically in the last three months and three months ago. I was looking at a 40 million dollar annualize headwinds so to see it.
That many of them that much in just a three month period is quite significant I'm working capital side through nine months, we've had a headwind of $22 million from not having cash from the alternative.
Right now, we expect that to normalize and Friday, 20th Cheetah twenty-three there should be no impact whatsoever on the incentive side, that's a headwind fifth year at about $40 million you know incentive compensation is expected to be higher for 22 performance.
And it was for 21 is that there could be any incremental headwind for that in your head.
Specific amount to share all I know what I would say is that his beloved online head when I'm all set substantially buying that growth that we're seeing in the EBITA business, particularly from <unk> performance and as we continue to make capital investment.
In sustainability business is there will be noise associated with that.
Total freak castle number looks like over the long term, we expect to see growth in core solid waste performance that track T. There's longterm trend any even exceeds the longterm trying at least that part.
Perfect lots and their appreciate that very much I'm sure there'll be some talk about pricing. So I'll I'll go ahead and turn it over thanks.
Thank God.
Thank you.
And our next question comes from Tony kept them with Morgan Stanley . If your line is open.
Thanks, so much.
Tyler just <unk>, that's why I only talked about pricing you know this year some of the strongest pricing we've really seen.
How are you thinking about pricing in terms of a trajectory into twenty-three I know some of that is already just based on the inflation. This year sort of locked in just you know just how are you thinking about the trajectory there.
Yeah. Good morning, telling me, obviously price and continues to be a key driver for some on the top line all of the lines of business were.
She'll really significant price drink commercial you loose approaching 10% at 9.8 11 per cent for industrial 6.3 <unk>.
So I have 6.5 per cent on me in my study line.
What.
I expected price will continue to be an important driver of our earnings we've.
What kind of music by so to combat this inflation.
Issue over the last 12 months and so most of it it's really good cost recovery.
I wanted to get to a point where price is not just cause recovered, but also margin expansion that I think that's gonna be the same for price going forward and we do expect that inflation will start to come back down bits.
In 2023 M and so.
<unk> the question last quarter, what's the ideal inflation number you know I don't know what the ideal inflation number is but I said, it's it's about nine per cent I know that so I think you'll start to see us.
Apply a little bit more prize two margin expansion not just cost recovery and that's really what it's been even with very high.
Price numbers, it's it's been something that's that we've added to do in order to cover the cost inflation I will say this I I think maybe the <unk>.
Piece of art on our earnings and Davina Andron I've talked about how good solid waste was but the peace that might've been the most surprising to US was volume really if you're thinking about collection is first of all I am being positive 1.7 per cent and there there was a little bit of.
I had went in there with with the Hurricane.
But still 1.7 per cent.
Time, when everybody's speculating about you know once you call him again turned down.
Was was really impressive too often I looked at our numbers. This morning special wipes was still up 50 per cent last week. So volume continues to be relatively good and that was the.
That was the positive part for Us I think.
Why are we saying that I think it's probably two things so even in the face of really pretty heavy pricing.
When you were saying continue to take market share and I also think you were saying our service show up better than our competition, which was positive.
Super wanted to ask about the the commodity basket I know you talked about it in size that and the prepared remarks, but could you remind us I guess I know you have in the past had some sort of sharing agreements with customers to a <unk>.
<unk> exposure to commodities I guess, what what percentage of contracts have that or however, you think about you know sort of the mitigation of of being exposed totally to the price and I know you have the recycling brokerage business and does that sorta mitigate you as well and I guess outside of O C.
See which which commodities are you most exposed to.
So somebody on a brokerage fees. We've always said you know that that certainly on <unk>, what we do in our in our peace.
So the business that we actually process the material and that's one large and no capital from our charged me an appointment with a lot of sense and helps us leverage our ability to move all the material. So we still feel good about that business.
The appointment actually obeys from the mortgage crisis <unk> on the traditional side, we've talked about how we protect the business on the downside two ways. One is for pricing on for some of it on fiber Greens do we have again, that's certainly something to consider when we're talking about the movement and fiber prices and how it affects you.
The second pieces really what we've gone from a fee for service model over the last couple of years and I think that they take away is what we're showing some variability in profitability as these prices have taken such a precipitous drop and it's really the mostly the fiber side.
Take away the business is still performing while we're still happy with it it's making money and has not changed our long term view of what we're gonna do in the recycling.
Maybe just maybe one out there and that is to give you a little bit of insight into what what we've done with these contracts.
Just to put this in perspective guess when the price drops from from 110 and this is our our bucket of of commodities dropped from 110 to 100.
Packed on that has a balance on orange is about 8 million Bucks they wanted to be exact.
If the price for to drop from 50 to 40, the impact is only about $3 million a little bit more than that maybe three and a half. So you can see that as price as price drops the negative impact on <unk> EBITDA really starts to slow and that that is representative of of all the changes we made contractually.
Over the last five years into John's point, even with a a significant drop off in price for the third quarter, and and and expecting that in the fourth quarter to.
That we still have the ninth best recycling quarter in our history for two three I don't think I don't think we would have been saying that five years ago.
Terrific. Thank you so much.
Thank you one moment for our next.
Our next question comes from J <unk> with Goldman Sachs. Your line is open.
Yes, hi, good morning around.
Okay.
Wondering if we could.
Can we talk about how your thinking about the collection and disposal pricing from here just conceptually do you feel like with the headwinds and recycling, we now need to push pricing more on the collection disposal.
Business can offset the you know 100 plus million dollar headwind and EBITDA for recycling.
And to make sure you know certain other way.
You feel like you've got enough you said in place to continue to push per cent margins as we figure out what the next 12 months might look like.
Yeah, I mean, I kind of think something a little different <unk> different businesses from a price perspective, I I will say this about the price and the solid waste business I feel like there's room for price increases.
January 15th So we went for almost 15 years, nothing I remember talking about 1% price and one per cent volumes. Many many years ago. So sometimes that's really went for quite a long time without getting any price increases.
And you know all we're doing is trying to recover this as I said this is for your high inflation I think.
[noise] core business in the solid waste the business, you're consenting to see us.
Used price on a significant way to to cover cost, but also improve margins at the same time, you know John and I have discussed taking costs out of the organization taking advantage of this tight labor markets.
Through attrition, we we saw a fair amount of that I'm 22, we'll see more 23 and 24.
I think the other thing I would point out on the margins nine Gary is if you look at two three of 2022 as a barometer of Howard performing we talked about solid waste improving on a year over year basis by 120 basis points. It's N, where we are today and the the impact from recycling commodity prices being 50 basis points and then.
All set to that and we're really happy to say that we deliver at 28.6 per cent. So I think that's it.
Indicator and we're we're starting 20th screen and so that's <unk> the head waiting to add recycling almost fully bacon and so I think we're set up well with where the pricing levels are today and then you know we have continued expectations for price based on the rollover of our index pricing.
That happens in the first half S twenty-three that sets us up while they're too.
Super and could I have your shift topics on the landfill gas I at night to see 30 per cent of your volumes uhm locked in and I'm wondering can you just talk about the terms you know our Arcadia prior to last week's announcement. It was talking about the the market essentially being in the twenties with attractive.
Escalators for longterm deals.
Can you comment on is that similar to the structure that you're saying.
Any additional contacts you you could provide for us on the terms.
Yeah. That's a great question you know.
What we're looking at is the mix business that will have it over time and you know if if we look at our expectations about habits portfolio granted so we can see our renewable energy grow sick, that's from where it is today and with that level of growth. We've got to look at this as a portfolio and the stuff that we can.
And that you saw the results of it in the third quarter to secure some of this pricing over the long term is an indication of our desire to ensure that we're securing returns as we outlined in our initial expectations. So as Jim mentioned desert certainly conservative outlooks for how we see that.
<unk> I lost specifically speak to the terms of the contract that we have in place, but as we have thought about it either on a longer and what we expect it to you as we manage of its portfolio over time, they're they're more on the tenure and where we think that we will also be managing things.
With three to five year contracts add the portfolio grouse.
Okay, Superman and lastly can you just talk about how the voluntary landfill gas purchase mark who's coming in so not not <unk> market.
The marketplace developing obviously on paper a lot of folks of.
Commitment suspicious landfill gas I'm wondering as you are having that conversation to it how it is.
The conversations played out versus your expectations on market.
Yeah, you know that's one of the key points that Tara and her team to keep speaking to US about that this is you know not just the transportation part of the market. It's the non transportation part of the market and people in public utilities and large as a teaching her a lesson to decarbonized are seeing the ratings.
And then I tried to <unk> to help to achieve their goals and objectives, which I think is speaking to the strong demand and outlook for the years ahead would you expect the other thing that will help bolster some clarity on the album for this business will be the E. P. A setting wall in queue for and so.
Hopefully those things working together will give us better visibility as we said our expectations for the earnings contribution to this business and 23 and beyond which will give you can color on them in the fourth quarter cough.
It's important to point out that this big a bathroom put me in a couple of corner to go really is only covering 17, new plans, we have close to 100 and we discuss this with you. When we were on the road you know 100 landfills that could go into that bucket right now we're really focusing on.
You know just 17, so there there's there's a lot of opportunity to grow the business beyond that.
Super appreciate the discussion don't worry we won't put the hundred in our in our model do it. Thank.
Thank you [laughter].
Okay.
Thank you. Our next question comes from Nowhere K with Oppenheimer. Your line is open.
Thanks for taking the questions first just a little bit of housekeeping on the recycling impact in the order.
Maybe help us understand was there anything in that the timing of how quickly you know the the basket dropped in the court of that that impacted your profitability versus a normalised run right cause it does seem like a decrementals, we're a little bit higher <unk> than what you are talking about even for fork you are on a run rate basis.
Yeah, I think I think that was certainly the precipitous drop, particularly my mortgage a little bit of a bladder seniority there was a little bit of.
An outsized impact on the corner.
What I would point to know <unk>, we looked at the <unk>.
Just a sequential with a quarter over quarter change in pricing and how that affected the overall EBITDA and when did I think what you're seeing is resiliency in the business that we went to gyms point, we wouldn't have seen four or five years ago still profitable business and if you look at the old calculation of one of those $10. It's on me. We've certainly separated from that you can see that in and what we.
Q Q3, and you can see in queue for going from 130 to 94 produced the 36 million dollar headwind for two four were saying $50, John calling from 131 and 50.
The data 90 dollar had one and as I pointed out he's still a profitable business. So I think we've achieved a big part of a whole bunch of <unk>. Your question because of the precipitous drop there's probably a little bit of a lag there.
Yep and I just wanted to clarify thank someone earlier.
Talk to about 100 million dollar headwind it from from where.
Recycling is that today going into 2023, if we just sort of level is today is that math correct you know what I.
I think Jim had mentioned the Decrementals would actually get even better as we get to lower levels here. So if we just take today's.
Basket price and say, okay, Here's where we're at between 22 as we entered 2023 do we have 100 million dollar headwind or should it be something less.
No I think I <unk> I don't think it's gonna be $100 million second part of it is if a crystal ball, where the price is going to look like and we have a view on pricing.
Pricing will do I think you'll see a little bit of improvement from Florida, 1941, and then sequentially throughout the year the level of apartments, where this morning. When she goes it's gonna drive the answer but I don't think even in this environment is quite $100 million.
Yep, Okay, great and when Quinn Quinn on on pricing insurance. If you don't mind you talked about you know kind of continued headroom for pricing that certainly makes a lot of sense <unk> can you talk a little bit about kind of the current customer discussions and whether you're starting to see any greater push back on price it would sort of point to some of the macro concern.
People have been racing.
Yeah. If you look here today and even corner of record you can see the appointment that we made to your price and yield back, but we didn't talk too much about it but it's a good spot when we look at a we're still growing volume and commercial industrial when you take out a loan for the noise I mentioned in my my prepared remarks residential piece again, we've got a strategy there that we've been point over the last.
Couple of years, but the other things we look at is obviously, what's going on <unk> Ah motorsport customer receptivity, the pricing or looking to insure that all that you hold backs actually improve quarter over quarter on quarter. So all indications are that the pricing activities were engaged and then we've taken a much more strategic look at that no over the last handful.
Four years of use this impulse or we can have a handful of years ago and I think that's why you're seeing need uplift and pricing performance without really conceding our ability to pro volume and thanks for sure.
Perfect. Thanks, so much for the color.
Thank you. Our next question comes from Michael Hoffman with Stifel. Your line is open. Thank you very much if we could come back to price has core.
Cross the lines of business and yield pizza, yet and if not when do you think.
He started hitting a peak.
The address is core price P cause yeah, so right the core price and then the conversion to yield which by the way you had a very good conversion to yield this quarter, it's improved each quarter. So I'm trying to understand the core.
And yield overall M M at conversion ratio has it Pete.
It's a tough question to answer just because I don't know exactly what happens with inflation, but what what we did say as we'd expected. So I should probably starts to come back down, which then would imply that the core price has S. P.
His advice and wanted to 50 per cent, which nobody expects then then I would tell you. The answer is no. So for now I think you could say it in core prices peaked I think the most important aspect of pricing.
Is the point that we met a couple of times, which is instead of just recovering costs, we'd love to be able to have a little bit of margin with with price and for for most of the 20th 22.
It's been kind of fighting this inflation battle with pricing.
Okay, well that's fine.
Sorry, sorry go ahead.
Your appointment on the conversion Evercore $5 right.
Great One night.
What John was speaking about just recently on customer of receptivity rolled back.
And we do really think that all of that is being benefitted I at what the type of operating environment right now and don't mind works at the men and women who pick up the garbage for all of our communities everyday or doing you know it's a it's a tough labor environment operators are same challenges and we are.
Differentiating our services and continue to be a code to your service provider.
When.
Hi is most effective in translating to yield it's when we hold on to your existing customers and because our service levels are differentiated and because small competitors are having a hard time meeting the needs because driver availability has been a challenge we are <unk>.
On to more and more of our customers and differentiating ourselves each day, and and I think that that will continue to be a strength or the business out of your head.
Okay. So the segway for me on all of that is.
Your.
Your entry price going into twenty-three basically should reflect your exit price coming out of 22.
And then you are all alluding to theirs structurally.
<unk> at least the volume so we're having a conversation says you're somewhere around eight on the top.
Asking for directional not guidance just I'm I'm in the right neighborhood, you're eight on the top before you get the M&A rollover, which we'd love to hear what your current thought is on your M&A rollover and then and then <unk> started coming down.
So I think there is a wider than normal spreads setting up between where you're going to report a price and where your <unk>. Your actual cause they're gonna play out over the course of the year.
And that would lead you to above average margins and Davina you suggested we should start with a 20th six is sort of a baseline.
And then it can improve if I do that looking at this year I'm, having a you're having above average margin expansion urine twenty-three and if I thought about that correctly.
I think when you think about the solid waste business in isolation that is absolutely correct to what we have talked about the recycling line of business.
I'm going to get crate and that will be a drag on March I didn't particularly in the first half twenty-three.
23, but I think your overall thesis about pricing and exiting 22 and coughing.
The beginning of 23 is the right one and that's why I'm back to earnings expansion containers point about wanting to see more of that really start can be martin at accretive rather than just having a cost I I think we will start to feel better traction on 923.
I I'll give you two data points, because I think you kind of ads for them in your question one being the roller benefit the M&A.
It was about $200 million in the acquisition during the quarter.
135 million at the annualized revenue for the roller benefits a little style of $100 million to 2020th three and then the other point is on the index pricing and our index pricing, we look at that that the 40 per cent next and our current protection is that with the.
Takes between what C P I as to which one is fixed.
And what is the cat, we think that that'll be in about 5.5% in a year ahead, which is pretty inconsistent with what we were seeing in the back part of this year.
Please send that gives us.
Strength going into the rollover overall four fries, starting in Q1 of 23.
Okay. So one last piece on it than what I'm hearing is sales are up EBITDAR up for summer and an 8% to 10% zone based on what you disappeared.
Based on an earlier question about free cash free cash all in capital spending including above average growth is probably flat to them given.
Given the headwinds.
All in capital spending is flat to down it's I dunno all in free cash flow all in free free cash for with all in capital spending meeting all all grow spending not just normal growth.
Your flat.
Yeah.
I think.
We'll get a lot more detail here, but I had a couple of months, but I just need your Saturday a surprise anybody when we come in and say free cash flow for 2023 is gonna be down all lay on versus 2022, because you've got.
Mentioned in my in my prepared remarks, with the biggest fear of Capex for these are G plans and for the rebuilds. The recycling plants is gonna be 2023, so we're talking about something in a billion dollars of Capex for those versus 500 550 I think.
This exact number for this year. So so it's gonna be 450 or $500 million of additional capex just for that so so <unk> looking at free cash flow all in for 2023, It's got it's gotta be that.
Okay that I think just everybody needed to understand that Directionally is this so there are no surprises right you're gonna have a great sales EBITDA trend free cash is what it is for all the growth and then I'm gonna get a real nice bumping at free cash come 25 26.
Yeah, that's right, that's where I want one quick attitude <unk>. She talks about index based pricing, we just had a lot of several times.
Because of the 12th month look back up a lotta these contracts.
Two biggest quarters for adjustment will be Q wanted two two of 2023. So we are looking forward to that.
Okay and then the last thing on the Orange is just so.
I understand that you have shared 21, you did about $40 million a contribution from that and then you've added new projects in 22 that 24 million dollar improvement is is partly spot market rates plus the new or is it all new projects.
No it's sinus spot market rate increase and as a reminder, latest pricing in the first half at 22, it's really strung up at $3. So you know there was a big piece of that that was minutes pricing. There was something that was electricity and then uhm was increment.
[noise] contribution from project development Okay.
Managing expectations I know the 400 million is a good number no question on that but it's really weighted heavily back ended cause the bigger two bigger driving projects of this or later in the development cycle you got a whole bunch of little ones early and then a couple of really big ones later, but when you <unk>.
I'll remember that right.
That's right 2025 for Orange G.
Okay.
This thing really takes off like kind of a space shuttle in 2025, because so many projects are coming online in 2024.
And a lot of that Capex being spent in 2023. So if we think about kind of inflows and outflows of cash.
You know we started it basically 22, maybe a little bit before by 22.
Big outflow on our Capex side for Archie plans as in 23, but these things happen.
There's there's a bit of a you know.
With respect to construction so a whole lot of those plans I think 11 to be exact come online at some point during 2024, so I'm all over you know and I haven't been.
Pretty much spread throughout the years. So the big inflows really started artist in 2025, and then we get into a full run rate in 2026 for Orangy, it's a little bit sooner for recycling.
Alright got that and then I realize they're still in budgets davina.
Shared with a bonus depreciation as soon as the nuclear how do we think about it the effective tax rate for next year is it.
Down flat.
Uhm effective tax rate, we guided at around 24.5% generally I expect it will be a little higher next year, but.
As they talked about I don't have to say Yep I got it I'm just going to need it directly to the model alright. Thank you very much nice job on the price folks keep it up.
<unk>.
One moment. Our next question comes from Sean Eastman with Keybanc. Your line is open.
Hi, everyone. Thanks for taking my question I Wanna do just come back to the.
<unk> ability you know sustainability growth investment program, how that translates into EBITDA over the next couple of years I feel like the discussion with Michael There gave us a good idea on the R. N. G. P. S. Just as we think about when these projects are kicking in.
But then if we move over to the kind of recycling automation side, maybe maybe help flesh that.
Heart of it out a little bit and then.
You know even beyond the sustainability element.
My understanding is there's another automation bucket in terms of more back office elements [noise].
And.
You know understanding how that kind of EBITDA benefits flows into the model in terms of timing anything around this would be very helpful. [noise].
So I'll I'll I'll I'll take a little bit of it and then maybe John can can add on your Sean I'm. So you can kind of touched on the strategy, there, which is really reducing our labor dependency taking advantage of the tight labor market and attrition.
And and so that's that's one bucket and we've said that's that's you know we think that number can be as many as in five to 7000 positions. We've gone through what those different buckets or some of them come out of recycling. The these these rebuilds our word somewhere between 30 and 40 per cent reduction in labor most of that by the way his third.
40, because a lot of those are you know pictures on the line and that's what those are and a large part the third party.
But as John talked about third party has been it's been a pretty big source of inflation.
Cost over the last year. So there there's there's that bucket. There there are there's our customer experience buckler by the way Shah our calls are down almost 27% year over year, that's a sign of of our improving customer customer service.
And it's and so at the same time, we're as we've used technology within customer experience. We're just simply not replacing somebody's positions, we've had as high as almost 50 per cent attrition.
In customer experience them. So what we don't like that number that's an awfully high number it makes it challenging for our management team to kind of staff.
This is an opportunity for us to use the technology that we put in place to take advantage of that church and and we have that match. So by the end of this year there will be as I said, you know about a mouse drops that we won't have chose to replace and then that goes from from a thousand up to as many as five to 7000, that's kind of bucket wanted and we talked a lot about our T. As you said.
And then kind of give you a bit of a lay out there.
With the recycling investments, there's really three forms of of of earnings.
Uplift there.
And the.
The earnings I flip it comes from the 30 to 40 per cent reduction labor. It comes from improved quality at the back of the plans and then it comes from increased throughput. So as you add all this technology optical sorting technology.
You really start processing a lot more material one of our big plants in Wisconsin.
Plans on going from 12000 times, a month to 18000 tons a month, so the throughputs going up by almost 50%.
And as you look at the roll out of that as I said in my head and my spirits.
We think that the the EBITDA pick up is.
Maybe a year or sooner. It. It then orangy, we think orangey kind of gets to full run rates by 2026, we think it's probably maybe 2025.
For these rebuilds, we're kind of rebuilding as as quickly as we can.
Fortunately haven't seen a lot of pressures Jonathan on the supply chain side for equipment to come again at the same time, Sean. We're also building some new plans, where we have a knee. So there's there's and we are taking a sharp pencil that in today's low commodity price environment, but there are some markets, even with low commodity prices.
Where we definitely have a needs. So so I think what you'll see is the big capex coming in 23.
EBITDA continuing to show up and 23, but really the big EBITDA uncle come in 24 25.
[noise], Okay that that was very detailed I really appreciate that and I'll turn it over there.
Oh.
Thank you we have a question from Walter Spratlin with RBC. Your line is open.
Yeah. Thanks for my Shepherd or good morning, everyone. So my question is coming back to you and the team were talking about what you've done within your contracts in the recycling side to limit when commodity prices go down the negative impact on EBITDA kind of it kind of contracts as as as prices go down which is great I'm wondering if if there's.
You know as the industry consolidate as the the desire for recycling go goes higher than Jamie your old comment about getting.
Recycling merging up to more your average murgeon.
And finally, given given the the the the <unk> the increased volatility in your earnings stream associated.
With commodity prices from recycling and and and natural gas because we are a waste of <unk> waste waste energy conversion.
Is there anything more you can do with regards to your contracts akin to see what a transport company will do with a fuel surcharge and effectively past the entire price.
Change onto the customer is that's something you could envision that it will be a pure fee for service and and.
You will relinquish or or or you you know.
Get rid of any of that that exposure that you have two commodity prices via some kind of surcharge program that you could adjusting your current pricing just just curious as to what you're thinking about further changes to contracts that would allow for that.
So often we've talked about that a little bit generalities, but I think specifically to your question, that's what you're seeing show up and our results. When you look at the numbers I referenced about Q3 to Q3 and Q4 forecast acute people were actually two four forecast a couple of things one that business is still generating healthy margins and great returns we've talked about returns in the recycling bin.
This is not just EBIT EBITDA margins and I think the reason why you're seeing that is because we kind of re priced if you will about 85 per cent of our third party processing agreement. So we've got a little bit of a room to go there and the way we're doing that you've heard us talk about the the revenue structure, but also this battle against contamination in the face.
Revenue levers that we polled to make sure that folks withdrawn processing plant. It's just not a processing facility, where we're gonna get paid the process of reading a fair return on top of that four were really starting to engage in what the revenue sharing myself, while none of us are happy about the person at the drop and how precipitous drop was I think what we're all taking.
Inventory of is the fact that our recycling <unk> recycling business and our <unk> are still producing a.
Good returns Greencastle March into that's why ears conviction about us in particular on the automated capital we're gonna invest because that's not really commodity base, that's really driving down opex and positioning positioning us I think to your earlier point to be able to continue to grow that business, even in a down her arm.
Perfect that that's that's a great color appreciate it.
Thank you. Our next question comes from Michael Senator with Bank of America. Your line is open.
He had one thanks for squeezing me and just to clarify the 50 dollar ton assumption in queue for Davina is that what your basket looks like in October or is that assuming maybe some some recovery in November December to get to that 50 dollar ton number.
It's a projection of our blend Edward the three month period, and there has been basically a continued decline.
We protected that.
Okay, Great and then just on on <unk> like I think they're not 250. So just so we understand the moving pieces. There cause this was I I. It was flat contribution this quarter, it's been a positive on a year to date, if Wednesday, where they are davina that's below the first half of next.
<unk> does that mean this is a headwind to EBITDA in 2023 or because it maybe some projects coming on that that I'll set that just trying to think about the the the <unk> being at 250 and that's below what we saw a very strong written in the first half of this year just the level set what that means for 2023.
That's a great question and you're thinking about it the right way because it rains has come down to the high speed in the first half that 22 her current outlet for twenty-three lemonade.
<unk> would be that you could have some EBITDA hadwin associated with the market price is <unk>.
<unk> talked about.
For earnings grabbed associated with new plants coming online doesn't really start to materialize any material fashion until more like 2024, 2023 still meaningfully construction oriented not significant impact Fran.
New capacity.
Got it and Jim you know awhile back you've laid out these targets revenue growth four to six <unk> five to seven with a cost inflation a three to four when you look today with the cost inflation, obviously, hi, what should be economy thinking about these ranges and what cost inflation could kind of looked like the 2020.
<unk> that cost inflation is one of the factors you were talking about that kind of drives you guys, you'll pricing decisions in the open market. Thanks, everyone.
Yeah, Michael <unk>, they were going through that exercise right now looking to see what <unk> looks like for 2023, we have some some pretty aggressive goals we've discussed internally.
And I think I think there's five to 7000 physicians that will that we will choose not to refill.
With with technology that helps us get there.
The the pushback on that on the other side is inflation. So I'm. So hopefully we get a little bit of help from inflation that starts to come down, but we do feel like the business can run at a lower cost structure, whether it's operating cost structure. When S. G that a number when you heard davina talk about <unk> number for the Gore, which at at 9.2%.
I don't know that anybody would've thought about that number for a quarter you know a few years back and so it's pretty impressive. They were there some of that is attributable to somebody's positions that have come out it's a little bit of kind of both categories Opex and yesterday, where these positions that's come out over 2022, but we do think that cost.
And cost efficiency is gonna be a very important.
Part of our our strategy going forward and I'm afraid that you articulated Michael the most important.
<unk>, if we look at 2022 his performance and that traditional range that we got into you at 5% to 7%, we haven't meaningfully exceeded that in a year, where this business grew organically and it with managing the topic cost environment that we've ever seen and so we're really pleased.
Set the EBITDA dollars at 11 per cent and a quarter.
So what are we visiting about that long term right and should be.
Makes sense. Thank you.
Thank you.
And our next question comes from David Nancy with Bird Your line is open.
[noise] yeah. Thank you sorry, I jumped on the call here, a little late but if you're covered visa can follow up on this line.
It's Ruth no lacrosse stick here, just a couple of but might've questions.
You may have commented already but in the hiring and retention what type of labor inflationary seeing currently kind of on a per person basis before these productivity related attrition trends and so forth you just talk about that and then second.
Wondering about maintenance and repairs I'm not sure if you manage that top down or bottom up but are you seeing any delays there because of this parts are labor shortages in any kind of update you can provide them the the level of routine maintenance activity today.
Yeah, they're great question basically from wage inflation perspective, a year ago. When you were at around 11% lifting that come down to about seven per cent. So that's at 400 basis point and prevent that we're talking about very happy to see where we are today and we thank the proactive steps to be kept a year ago or paying dividends to.
Today I'm in repair and maintenance side I would tell you we manage at the top down and lastly, I'll just <unk> I'm <unk> I'm in every direction and it's something that we have collaborative purchase on across the business and it hasn't cost category for us.
And it's got a lot of different factors that resolve the 19th of difficult <unk> and that's one of the places that we really need to see some traction on and we're working with the manufacturers to be sure that when you get the check that'd be praying for when we expect them. The other things that are happening in Texas.
Nations in the market place are very valuable.
Transportation space, and so making sure that we are the preferred employer. It has been a priority me has made investments there and will continue to invest in the future. Aside from that then then things that are really driving increases the commodity based inflationary.
[noise] pressures that we've seen and lived in parts and supplies and we are seeing some moderation in there that gives us some hope that in 2023, there will be some moderation by my levels 22.
Sounds good thank you for the details.
Alright.
Thank you and there are no other questions in the queue I'd like to turn the call back to Mister Gemfish for closing remarks.
Okay. Thank you and and I I do know that some of our Florida team are on the call listening today and I just Wanna, let them know how how about if we are.
During this recovery from me and Ah tough hurricane, particularly with the storm surge coming in as much as it did.
We we did lose property, we've talked about that or.
Folks lost some property as well.
Fortunately everybody was was safe everybody on the on the Florida that'd be <unk>.
And you said I'll note or were standing right next to you and standing next two floridians in general during this recovery.
So thank you though for for your efforts throughout this particularly there in southwest, Florida. Thanks, again to everyone for joining us today, and we'll talk to you next <unk>.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin to T to raise your hand doing <unk> you can dial 911.
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