Q1 2023 Waste Management Inc Earnings Call
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I would now like to hand, the conference over to add equal single director of Investor Relations you may begin.
Thank you Linda and good morning.
Everyone. Thank you for joining us for our first quarter 2023 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 Reagan Executive Vice President and Chief Financial Officer.
You'll hear prepared comments from each of them today.
Jim will cover high level financials, and provide a strategic update John will cover an operating overview and Dominion will cover the details of the financials.
Before we get started please note that we have filed a form 8-K. This morning that includes the earnings press release. It is available on our website at Www Dot Wm Dot com.
The form 8-K, the press release and the schedules to the press release include important information.
During the call you will hear forward looking statements, which are based on current expectations projections or opinions about future periods.
All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.
Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K.
Doug 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 John and Divina will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons unless otherwise stated will be with the first quarter of 2022.
Net income EPS operating EBITDA and margin and operating expense and margin results have been adjusted to enhance comparability.
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 tables, which can be found on the company's website at www Dot Wm dot com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections.
This call is being recorded and will be available 24 hours a day beginning approximately one P. M. Eastern time today to hear a replay of the call access to Wm website at Www Dot investors Dot Wm Dot com Todd.
Time sensitive information provided during today's call, which is occurring on April 27, 2023 may no longer be accurate at the time of a replay any redistribution retransmission or rebroadcast of this call in any form without the express written consent of <unk> is prohibited now I will turn the call over to Ws, President and CEO Jim fish.
Thanks, Ed and thank you all for joining us.
We're off to a solid start in 2023 with first quarter results delivering on our expectations and keeping us on track to achieve our full year guidance.
First quarter revenue grew 5% with continued strong organic growth in our collection and disposal business of 7% we're.
We're pleased with these results, particularly when you consider the impact of the West coast weather disruptions on our operations.
With that said our first quarter performance was basically on our budget and our strategic priorities of maintaining strong price discipline permanently, reducing our operating and SG&A cost structure through business optimization technology, and automation and leveraging our sustainability platform for growth are right on track.
Executing on these priorities will produce the robust short term and long term financial performance than we projected.
As you heard at our sustainability Investor day at the beginning of the month, we're very enthusiastic about how the growth in our renewable energy and recycling businesses strengthens wm's compelling investment thesis.
We expect the investments that we're making over the next several years to provide meaningful operating EBITDA and free cash flow growth with impressive returns.
We remain on track to bring online two new renewable natural gas facilities and seven newly automated material recovery facilities by the end of the year.
We're also opening one new market in 2023, and the greater Toronto, and the greater Toronto area, which positions us strongly in the largest growth market in Canada.
Even as these important parts of our operations grow our solid waste business will continue to make up the lion's share of our earnings projected to generate roughly 85% of operating EBITDA in 2026.
As a result, our focus on optimizing performance and reducing costs in our solid waste business through technology and automation is critically important and will serve to further separate us from our competition.
One excellent example of this is the expansion of our customer self service capabilities, where we have reduced our call Center department costs in the first quarter by more than 20% compared to last year, while at the same time, maintaining or improving our net promoter scores in the commercial and industrial lines of business.
So far in 2023 BW team continues to deliver strong performance.
The investments, we're making set us up to further differentiate our industry, leading asset network and capabilities.
When you combine these strategic positioning.
When you combine this strategic positioning with the essential nature of our service our diverse customer base and our recurring revenue streams and provides confidence in our ability to continue to reach our strong financial projections.
Over the long term.
For the remainder of 2003, our outlook remains consistent with our full year guidance provided at the beginning of the year, including adjusted operating EBITDA growth of 7% at the midpoint and between 40 and 80 basis points of adjusted operating EBITDA margin expansion, driven by our collection and disposal business.
In closing I want to thank the 49000 people behind <unk> success, this quarter and every quarter.
Without this team none of this would be possible and I'll now turn the call over to Jonathan discuss our operational results for the quarter. Thanks, Jim and good morning two.
2023 has started off as planned and we're pleased to have achieved our first quarter targets overall adjusted operating EBITDA grew nearly 4% in operating EBITDA in the collection and disposal business grew 7% in the quarter.
One area that exceeded our expectations with pricing as we continue to execute on our revenue management programs to recover cost increases and improve margins as Jim mentioned, our first quarter organic revenue growth in our collection and disposal business was 7%. This growth was led by core price of seven 4%, which exceeded both last year and our play.
For the first quarter.
This strong core price translated into collection and disposal yield of six 2%, a 70 basis point improvement compared with Q1 of 2022, we saw a strong yield performance across all lines of business and are particularly proud of our post collection yield.
We have consistently emphasized the importance of post collection pricing and in Q1, we delivered yield of eight 9% of our transfer stations.
And five 4% for landfill MSW bolt increases from last year in fact, the transfer station yield as a new high for that line of business.
Which is helping to offset increasing costs of labor and transportation.
Our collective focus continues to be striking the right balance between maximizing customer lifetime value and increasing price to recover higher costs.
We remain confident that we can achieve our full year pricing expectations for Corp.
Of six 5% to 7% and yield approaching five 5%.
Turning to volumes first quarter collection and disposal volume grew 8% landfill volumes led the way with C&D volumes up almost 37% in the quarter driven by the hurricane cleanup in Florida, and MSW volumes increased by almost 3%.
Special waste volumes moderated in the quarter due to the timing of event driven work, but our pipeline remains robust and we believe that those volumes will provide incremental revenue growth as we progress through Q2 and the balance of the year.
Our collection volumes were down modestly in the quarter driven by intentional steps, we continue to take to price every contract to achieve acceptable returns.
This has led to some non regrettable volume losses in our residential and commercial business.
With profitability improving in each line of business and contract wins with healthy price increases we're pleased to see our differentiated service and disciplined approach yield benefits for the full year. We continue to expect flat overall volumes at the midpoint of our guidance.
Turning to operating expenses, which increased 70 basis points as a percentage of revenue to 63%.
I want to frame. These results and then talk about the efforts in place to optimize our cost to serve in 2023 and over the long term.
There were two primary contributors to our first quarter results the dilutive impact of recent acquisitions and continued inflationary cost pressure as.
As a reminder, we closed on about $365 million of acquisitions of solid waste and recycling businesses in the second half of the year.
Integration costs and upfront dilutive margins of these acquisitions had about a 35 basis point impact in the quarter.
While this impact was a little more than expected overall, we're very pleased with the progress being made on creating value from these businesses. The remaining impact was due to persistent cost inflation, which was most significant in wages repair and maintenance and subcontractor costs.
The good news is we see signs of easing cost pressures.
And the steps we are taking to combat higher costs are also showing benefits frontline wage increases are now in the mid single digit range as compared to the high single to low double digit increases that we saw in late 2021 and 2022.
And we're starting to see truck orders fulfilled which benefits every aspect of our cost structure because employee engagement is better downtime on route is minimized repair cost to reduce and expensive rentals can be eliminated.
Getting trucks delivered will also be key to residential automation as we move from traditional rear load to automated side loader were taken to help her off the back and getting about a 30% productivity pickup, which equates to lower driver technician and truck capital needs.
We've talked a lot about the work we're doing to optimize our cost to serve investments we are making in our people and process are also important we're always working to make <unk>, a great safe place to work and delivering our team members are best in class compensation and benefits package. One of the benefits. We know that comes from these efforts as improved retention, which then translates into even better.
Customer service and optimize cost structure, because our tenure drivers are the safest and most efficient in.
In the first quarter of 2023, we saw the best driver retention, we've seen in two years this positions us to drive down our training at overtime hours improve overall efficiency and most important see continued improvement in our safety performance in closing I want to thank the entire Wm team for the fantastic job, they do safely and reliably serving our customers.
Day in and day out we've had a solid start to 2023 and look forward to building on our success I will now turn the call over to Divina discuss our financial results in further detail.
Thanks, John and good morning.
To see our robust revenue growth and disciplined focus on cost control will translate into solid operating and free cash flow.
First quarter cash flow from operations of 1.0 for $1 billion in line with our plan and a strong result, particularly when you consider higher cash interest and incentive compensation payments.
Capital spending in the quarter totaled $660 million with $504 million related to normal quest capital to support our business and $156 million of spending on <unk>.
<unk> ability growth projects.
On the capital front, there are two key takeaways.
First is that we're pleased with the continued progress on our sustainability projects relative to plan.
The second is that truck deliveries are improving.
At this time last year, we have received less than 50 trucks.
We received about 470 <unk>.
<unk> is certainly better and show some easing of the significant supply chain constraints from a year ago, we're still waiting for truck deliveries planned for 2022.
These delays impact our team's ability to deliver on residential collection optimization objectives and targeted improvements in our maintenance maintenance costs per driver hour.
So while we're encouraged the worst of the recent uncertainty is behind us.
We still need to see a more reliable delivery schedule from manufacturers.
Our business generated free cash flow of $395 million in the first quarter and free cash flow before sustainability growth investments of $551 million.
This puts us on track to deliver our full year guidance on this measure at between $2 six and $2 7 billion.
Even as we invest in high return sustainability growth projects within our business. We continue to demonstrate our commitment to all of our capital allocation priorities.
We returned $639 million to shareholders during the quarter paying $289 million in dividends and repurchasing $350 million of our stock.
We expect dividends to total about $1 $1 billion this year and with our outlook for strong earnings growth over the remainder of the year and a healthy balance sheet, we expect to continue to repurchase our shares fairly ratably over the remainder of the year.
Our leverage ratio at the end of the first quarter with $2 eight times, which is well within our target ratio of between two five and three times.
About 18% of our total debt portfolio is at variable rates and our pre tax weighted average cost of debt for the quarter was about three 7%.
Our balance sheet is strong and we remain well positioned to fund growth investments.
Turning to SG&A, we're pleased with the progress, we're making to drive leverage from a more efficient cost structure.
In the first quarter SG&A costs were essentially flat with the same period in the prior year and spending as a percentage of revenue improved by 40 basis points to nine 7%.
These results demonstrate our success in rationalizing costs and optimizing our sales and customer experience function.
We expect our investments to continue to drive improvement in SG&A costs and put us on a path toward a permanently reduced SG&A cost structure.
Our operating EBITDA margin performance for the quarter was generally in line with our expectations.
The 40 basis point margin decline year over year is due to three things.
One commodity price impacts on our renewable energy and recycling businesses, which created a 50 basis point margin headwind.
To the dilutive impact of acquisitions completed in late 2022, which had about a 40 basis point impact.
And three cost pressure in our collection and disposal business from wage inflation and delayed truck deliveries, which we estimate had about a 20 basis point impact.
These margin impacts were offset in part by a 40 basis point improvement in SG&A and a 30 basis point benefit from the timing of alternative fuel tax credits.
Our disciplined organic revenue growth and focus on optimization and cost control are expected to drive year over year margin expansion for the remainder of the year, particularly in the third and fourth quarters.
In closing the Wm team has delivered a solid start to the year, which sets us up for another year of strong financial growth in 2023.
I can't thank our hardworking team members enough for all of their contributions to our success.
With that to Wanda, let's open the line for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Brian <unk> with Citi. Your line is open.
Good morning, and thanks for taking the question.
EBIT margins were.
<unk> at least relative to the sell side I appreciate all the detail.
Provided there.
You reiterated guidance for the 40 days 80 basis points of improvement for 'twenty. Three so do you think we'd see EBIT margins inflect in <unk> or at least maybe approach flat and then <unk> just a little bit of timing.
We stayed with the timing of improvement in margins.
Yes. It is.
Great question, we definitely see the lion's share of that contribution of EBITDA margin coming in the third and fourth quarters. We do expect some improvement from what we saw in the first quarter.
I want to point out a couple of things that happened in Q1 that we don't see as indicative of the margins that we will expect for the remainder of the year as I mentioned on the commodity businesses that was 50 basis points of the impact in the quarter, we expected our first quarter to be the hardest comp on a year over.
For year basis from commodity prices and so we think most of that impact starts to abate beginning in Q2, but as I said most of that really comes in Q3 and Q4, when the year over year comparisons on commodity prices improve.
On the dilutive impact of M&A.
At 40 basis points that was about half solid waste and half recycling and.
Like I said, we're pleased with the traction that we're seeing in each of those businesses on the recycling side because that business is.
In a development phase we knew that there would be some upfront cost associated with integrating that business. They just happened to be higher than our expectations. We don't expect that to continue over the remainder of the year. So that's another thing that gives us confidence on the solid waste side, we took a really important step that's team member focused and in <unk>.
<unk> in our front line by making the MLK holiday holiday across the entire organization that emphasizes our focus on people first but that is a Q1 only event and thats something else that will abate for the rest of the year. So those are the things that give us confidence that the Q1 result of 40 basis.
<unk> will exceed what you see for the remainder of the year and in fact, we do see some of that coming out in Q2, but Q3 and Q4 is really where you start to see some strong results.
Great. Thanks, Thanks for that detail.
Last question for me, maybe just how did the.
Value of the recycled commodities <unk> compare to your expectations can.
Can you share what you might be expecting for <unk> and apologies if I missed this but are you still looking for a $70 a ton commodity basket for 2020, thanks, and I'll turn it over.
Brian we are still looking to see $70 for 2023, the trend has been good and Thats, what we what we anticipated. So at the end of Q4, we were at $47 Q1 was at $54, but it got better as you went through the quarter. So $57 was our average in the month of March.
And then as we're getting into April we're seeing that continue to improve a couple of things are helping us the mill capacity Thats coming online.
Is helping with demand on the back end, we're also seeing a.
Pretty significant uptick in pricing for plastics for aluminum's.
And a little bit for OCC. So so we are still sticking with our $70 and feel pretty confident in that.
Thank you.
Please standby for our next question.
Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is open.
Thanks, so much.
You mentioned in the prepared remarks, getting the additional truck orders fulfilled.
And that getting more back to normal.
Quickly can we see that productivity impact into your results and could that be upside to the guidance for this year or is that already embedded in the guide that it returns to more of a normal.
Trend.
I think listen we're thrilled that the supply chain and truck deliveries are starting to are starting to abate is divina mentioned, we almost we delivered almost 500 trucks year to date versus 50 last year. It takes 30% to 45 days to get those vehicles sort of on the road and get the older vehicles also there is a little bit of a lag.
That was considered when we put together our plan for EBITDA and EBITDA margin of this year. We went back and took a look before the call. We probably if you go back to kind of post Covid, we're probably lagging 2000, plus vehicles from when or what our fleet plan would have been so we're going to get a full complement of trucks. This year, probably 15 to 1600 is what we.
So we're going to continue to to get those assets in play as quick as we can and drive the benefit but keep in mind part of the MLR pressure is is that it's not just the trucks, we didn't get in 'twenty, two which we caught up in 'twenty, one from 'twenty to 'twenty two to 'twenty three et cetera.
Great I wanted to just ask my follow up on the sort of more recently April late March trends.
Have you seen those improving or has there been any change.
Obviously, the banking crisis sort of doesn't impact your bill.
Business as much as some of the.
Other business services companies, but any heightened recession concerns with your customers like any change in conversations that youre, having with customers.
So.
John can address the cost side and what we're seeing so far I would tell you that as far as.
The overall macro economy.
We've been looking at it closely because it seems as if every every day somebody comes out with a different projection.
Maybe the best indicators for us are things like churn and price rollbacks of those have been at the historic low end of our ranges and continue to be there also looking at some of our volume numbers, especially MSW MSW was.
Was two 7% it's around 3% still so.
Those are pretty good signs for the overall economy.
Now we tend to be kind of at the backend so sometimes we don't see.
The early signs but.
Everything we're looking at still seems to be okay.
It doesn't look like a blowout for sure but it doesn't look like the bottom is falling out so thats encouraging.
I think on the cost side, Tony addressed MMR and some of the challenge we have seen there. The good news is we're starting to open up on the Labor front I said in my prepared comments, we were close to high single low double digits and Thats moderated back down to mid single digits. So that certainly is a benefit going forward throughout the year subcontractors, we're still seeing a little bit of lag there and it's.
Really more third party transporters.
But as you saw within our post collection pricing and more specifically our transfer stations, we continue to address that through through the revenue quality at the remote gates at are the transfer station I think.
When it all comes down to it I think when we talk about automation and optimization, it's really about permanently lowering our operating expense.
Exposure and Thats really as Jim mentioned, what we're really focused on for the balance of the year.
Fantastic. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone. Good morning.
Hi, I'm wondering if you can talk about.
Second quarter. So normal seasonality is your margins are up about 200 basis points second quarter versus the first quarter.
You mentioned a number of one offs in.
In the first quarter, so I'm wondering as you're thinking about the cadence is there potential for margins to be up stronger sequentially than the typical two points that we've seen in the past.
Yes, it's a great question, Jerry and Thats some of the analysis, we've been particularly honed in on and looking at and that is our expectation is that the first quarter of 2023 had some margin pressures that we see as more related to 2023, specifically such that.
The normal seasonal uptick that we see from a revenue perspective will provide than the typical.
Expansion and then on top of that we will have some added benefits from lapping.
Some of the commodity price impacts I've talked about.
Also expecting to see some strong accretive revenue come back in the collection line of business in particular as our differentiated service model really paves some dividends in terms of our national accounts business, where we are going to lap some of the contract explorations.
And we're going to see some contract return. So those are the things that give us so much confidence that Q2 really will be outsized relative to a typical year.
That's great. So really you have high visibility on essentially getting to your margin run rate as early as Q. Okay.
And can I ask on.
On a poll.
Post collection pricing momentum.
John you mentioned in the prepared remarks, how much more momentum is there I would presume a chunk of that is CPI pricing rolling but can you just expand and really nice to see that.
Strong numbers both in transfer stations.
Landfills, yes.
Yes, Jerry I would tell you that's something we've been working on it and that's been a tougher hill to climb obviously, because those are bigger chunks of your volume and big customers when youre, making those decisions I think.
As I mentioned, the transportation piece and a lot of that is labor and fuel. If you will has continued to persist which is why one of the reasons why you continue to CSP.
As aggressive as we are on the transfer station side and on the landfill side again, the cost of the cost of constructing and operating as landfills is not getting cheaper so.
Part of our pricing strategy, obviously at a minimum to recover our investment there, but also look for margin improvement margin improvement where that opportunity exists I think Jerry. It's also worth mentioning that our team has over the years last couple of years has really come to appreciate the fact that that landfill air space is a precious commodity and.
If you think about particularly the east coast.
<unk> doesn't come cheaply and it's there is a finite life to all of those so.
So we need to price it that way and Thats and Thats.
A large part of what Youre seeing out of transportation, but also.
Largely landfill pricing.
Okay.
One last one if I could SG&A is obviously been a big focus for you and really strong cost control. This quarter can you talk about did we get a full quarter run rate out of the initiatives that you mentioned on the call Center side this quarter or is that momentum building over the course of the year. So on a call center side.
We did not refill about 580 positions last year and there are another 300 that we will choose not to refill. This year. So I would say were probably we were probably 60% of the way there.
On that piece, but some of those other positions that we've talked about John mentioned, it which is replacing rear loaders with ourselves when you talked about 30% productivity pick up there.
We're not because we haven't been receiving the trucks I mean, you can make that swap obviously without the truck.
There's some work that's involved with our public sector team they have to talk to our customers and make sure that they're comfortable with going to trash just being in one of those pillars as opposed to everything sitting on the curb and they've made nice progress there, but as we do that.
We think theres another probably up to 2000 positions that are held for positions that we just will choose not to refill and as you can imagine those have very high turnover somewhere in the neighborhood of 50% for those so once those trucks come in once we've talked to the customer base, we will transition those and maybe the most important visa John .
Mentioned as it helps us from a safety standpoint, 70% of our injuries happen in the residential line of business and I would guess that the.
90% of that 70% are on rear loaders.
Okay very interesting thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Tyler Brown with Raymond James Your line is open.
Good morning.
Sure.
Hey, Jim John just I.
Looking back to the Q4 and I'm not really sure I saw it but can you just kind of remind us what is embedded.
The level of unit cost inflation kind of embedded in the 'twenty three guide and maybe where are you today.
Sure in terms of unit cost inflation.
Expected in 2023 about 4% to 5% unit cost inflation for the year.
And when we look at Q1, it was certainly higher than that but our expectation is that that moderates and as John has talked about in particular labor and repair and maintenance are expected to benefit from the actions that we saw early signs of.
As we looked at February March, but we expect to continue to gain momentum over the remainder of the year.
Alright, okay, so that kind of naturally slopes and so.
Look Jim I don't want to get into the comparison game, but one of your competitors showed core pricing accelerated in Q1. It looks like your pricing maybe peaked in Q4 I get that there are a variety of factors at play, but I have just gotten a lot of questions. This morning, but just any thoughts on the pricing environment. Your go to market strategy and do you just feel comfortable.
That you can maintain a nice positive spread to unit cost inflation, both over the short and long term.
Yeah look I didn't I didn't see what their numbers were.
But I would tell you. This first of all I looked back historically, we anticipated the question and historically Q1 has been the lowest yield for us over a period of probably a decade, it's almost always been the lowest yield number on a quarter by quarter basis.
But when I look at how we're doing with things like rollback.
Price and churn those are as I said as we near the bottom end of our of our historic ranges.
And I also was very encouraged to see pricing in two particular places, we're encouraging residential which John talked about and <unk>.
Landfill and transfer those those are we just talked about it with Jerry but those were really important areas for us to kind of all three of those.
When we talked about it in probably four years ago, we're talking about something less than 1% and now we're talking about much higher numbers, albeit in a higher inflation environment, but still I think youre seeing the discipline there around pricing very strong. So I don't know really what the other folks reported what I would tell you there is.
There is no loss of discipline whatsoever, there's really I think Tyler three areas. The work that we're all focused on for 'twenty three for and those are top of line.
At the very top of the list is got to be price.
And then a close second to that is what Jonathan was talking about which is cost control, both SG&A and Opex and.
And using technology to facilitate that and then of course the third one is when we talked about three weeks ago, which are those in sustainability investments. So those those three are really kind of our our near term focus that will help us out in the long term.
Okay perfect.
One said again I got to kind.
Kind of go back over this margin walk there is a ton in there so it make sure I've got it so commodities in Rins were 50 basis point headwind.
M&A was about a 40 basis point headwind.
You mentioned something I think you said 30 basis points from a fuel tax credit I was unclear does that hurt.
Or help.
And then you mentioned and higher incentive compensation I wasn't sure. If you are talking cash flow EBITDA and then is the holiday edition about a 50 basis point headwind as well as I would assume it's kind of.
Like one less workday.
Yes, So let me let me take that in pieces.
Alternative fuel tax credit with a help of 30 basis points and now the help because of timing. So you might recall that last year. We got there was a delay in the approval of those tax credits.
By by governments and so there was a delay in our recognition of those tax credit benefits until the third quarter of 2022, So what youre seeing this year is that those are going to be recognized quarter by quarter. So we got the benefit in Q1, we will have another benefit in Q2, and then that moderates in Q3 reverses itself and then.
Normalizes beginning in Q4.
The dilutive impact from commodity business is it 50 basis points you had that right.
Incentive compensation was cash flow. So okay. Yeah that was a cash flow impact when we gave our guidance for 2023, we talked about working capital being a headwind in the year and a lot of that headwind really all of that headwind was in the first quarter as anticipated.
Because higher incentive compensation payments happened in Q1, because of the 2022 outperformance relative to our plan.
So so that moderates and really starts to become a tailwind over the remainder of the year.
On the solid waste side, when I was mentioning the MLK holiday that was part of the 20 basis point margin headwind that we saw from the solid waste part of the business.
What's really important there I think in terms of thinking about what it means for the rest of the year is that that impact isn't something that repeats itself. It actually.
Doesn't become a health necessarily but it's not something that we see repeating over the remainder of the year because it was a one time event.
It was not it wasn't one last workday, we still had to work. Those days is just we pay everybody a time and a half.
Yes.
Okay. That's very helpful. Okay, perfect Super helpful. As usual thank you so much.
Thanks, Tyler Thank you.
Please standby for our next question.
Our next question comes from the line of Michael Hoffman with Stifel. Your line is open.
Hi, <unk> how is everybody today.
Hey, Michael.
So John .
What is the trend on service intervals.
New business formation temporary roll off asset utilization.
So the service interval piece, Michael is still positive.
That's the headline.
In addition to the service intervals, though as Jim mentioned in our commentary a few minutes ago. The other parts of that that were really paying close attention to is.
Is what the churn rates doing and what the rollbacks are doing even as we continue to.
Be aggressive on the pricing side and those have all continued to stay static and in a good spot and service intervals are still are still positive. So we feel good about that from an asset utilization perspective, Michael I think it's important that as John mentioned it takes 35 to 40 days to get those new trucks in service and on.
The road that means that we've been holding onto some of our some of our older vehicles longer and so asset utilization not necessarily where we like it to be but that's because we've needed to be intentional about keeping our vehicles and maintaining them. So that we meet all of our service needs for our customers. This is anecdotal.
Michael but we did our business reviews with all our areas last week.
And one of our areas actually was scheduled to return some rental trucks, which as you can imagine are are done at a premium and we were told hey, your trucks are going to be and it wasn't a large amount of trucks will lessen that doesn't trucks, but this area turn their trucks back in and then we got delayed another 30 or 45 days on some of the delivery. So to <unk> point, there is a little pensive missed by the field and we understand it.
Those trucks back whether it's rentals our surplus assets. The good news is like we said Theres almost 500 trucks that are on the ground not in service yet so when we think about rentals in surplus assets, we have a clear path for the rest of the year and more confidence in the delivery schedule that we're going to be able to take those out.
And then just a subtlety on temp roll off is I mean, that's sort of a good canary in the coal mine about business activity, what's the temp roll off utilization look like.
I don't know Michael we've seen meaningful movement. There I would tell you we don't talk about weather, but there was a handful of areas on the West coast, where we were shut down for a few days in some kind of really odd weather.
But other than that it's been I think the temp story has been a consistent one.
Okay, and then davina.
Sure certainly I know historically done, but I think it helps put in perspective Tyler's question Youre six two was a good number but what's the mix of index versus.
Open market because I think there is some weighting issue there that people should appreciate given the 70% of your index is happening now and it's a number from last summer and not the end of the calendar year.
So we've we've said Michael about 40% of our revenue is indexed it's not all it's not all CPI as we've talked about the majority of that though really is we all know runs through that residential line of business and Thats. When you look at our pricing and yield results in our residential I think for the quarter were up $53 million of revenue were down about two 9 million and volume so we.
<unk> down that path until we get to some acceptable spot there.
Darrin, it's noteworthy that that residential line of business as you can imagine is one that it's a little more of the inflation some of the other ones due to the labor intensity and whatnot, but if you look at where our CPI was last quarter this quarter.
Look at core price and yield we're still pricing above that so we're getting traction even above above that CPI number.
But just to be clear that part of the drag on the <unk> two.
People are looking sequentially is the number that's in the first half.
Isn't the immediate just immediate CPI, it's actually one from last summer, which would be lower than the CPI that was at the end of the year.
That's the subtlety of your model because so much of your business resets in the first half it's not a negative its just everybody needs to understand it. Yes, you are right Michael about 70% of our resets are in the first half of the year and those are all index to a year ago activity and so we will see some of that benefit as we go through the rest of the year.
In terms of where inflation headline numbers continued to be high.
Right, Okay and then.
On the commodity side.
Pieces of your model of Rins, Nat gas and electricity.
Overall, you have an assumption all of this would improve I have a suspicion maybe you will end up with two less than or right versus two Reits and I'll have to get to the same outcome, but do you feel comfortable about the whole mix not just risk.
Recycling that all of those things are going to collectively get to the right place relative to the guide.
I'd like to what you said that Michael I was trying to figure out kind of a good way to say that you said it better than I would say youre right.
And any big business Theres going to be a few things that work in our favor a few things that work against this RIN pricing is probably a little bit against us right now.
We budgeted $2 30.
$2. So that one may end up being a little bit of a headwind, but we've also gone through some of the tailwind to I mean SG&A is.
I'm not sure we've ever had on SG&A number as a percent of revenue below 10% for the first quarter because the revenue base is always low for Q1, So we're doing a better job on SG&A than than we actually anticipated.
I can say the same thing about MSW volume or a couple of the other things. So youre right Theres a few things that are that are coming in a little lower than our expectation.
RIN pricing would be one of those on the other side recycle pricing as we've talked about a little bit earlier.
Is right on our expectations. So we're pleased with that because I know there were a few that had questioned our $70 number.
And that looks like it's probably going to hold.
You're right about the fact that there is a whole bunch of pieces in play here.
Okay, and then last one for me one of the things I've noticed that you've all been doing and maybe it with perfect portfolio or maybe it was just an outcome is the gap between.
What you are getting in yoga and collection versus the yield and post collection has been closing.
How much more can that clothes, that's a good thing well how much more can that close.
I think I think it will continue to close and I said, it a little bit earlier, but theres a real appreciation for the fact that especially landfill aerospace is a precious commodity, particularly when you think about it on the east coast and on the West Coast I mean, maybe not maybe not quite as much in the middle of the country, but definitely on the east Coast I mean, you see it anybody.
Who lives in New York season, anybody who lives in Boston season.
And I'm not sure we've priced it that way over the years.
Youre seeing us price it that way we recognized that these have a finite life to them and so while I fill them up with with kind of low priced tons when we.
When we can fill them up at a slower rate maybe at higher priced tons preserve some of that aerospace give us time to figure out our solution. Once those do ultimately go away.
Hey, Thanks for taking the questions look forward to seeing in New Orleans.
Thanks, Michael.
Thank you please standby for our next question.
Our next question comes from the line of Kevin Chiang with CIBC. Your line is open.
Hi, good morning, Thanks for thanks for taking my question here, maybe just on your prepared remarks, you talked about.
The Murph you opened in Toronto here, just wondering how that positions you give it given the province.
Ontario is looking to put in the producer responsibility legislation producer responsibility ability legislation done.
This is mark.
Make you more competitive as you think of the opportunities stemming from that legislation.
I think it does Kevin I think it puts us in a great position there, it's the highest growth.
Vince and Canada and Toronto is.
The biggest city in Canada. So it puts us in a really really good position add to that that this murph will be one of the new style merge so with a lot of of automation in it so it comes to us.
As any of our numerous will with lower labor cost, 30% is what we're seeing in terms of labor cost per unit with the automation that we're adding.
So we're excited about the mirth coming in to Toronto and <unk>.
Our minds is a perfect place to put anymore.
Perfect no that makes a ton of sense.
And maybe just.
The EPA did come out with I guess, the phase III proposal on heavy duty vehicles looking to.
Continue to drive that some sort of net zero target over time and I'm. Just wondering how you view that I know you. Obviously ahead of the curves here versus some of your peers on on investing <unk> suites.
But just given some of the stuff you've seen not sure. If you think that impacts your fleet strategy or maybe they need to accelerate some of the investments in electrification or others or some other type of propulsion system that gets it to some sort of ghd emission target based on the Epa's proposal here.
Yes, Kevin I mean listen we've talked a lot about our <unk> strategy and obviously really pleased with the way that's gone and what the outlook of that as especially as we continue to bring on these these R&D plans, but at the same time, we are continuing to look at other.
Propulsion techniques. If you will electrification always comes to mind people, we're talking about hydrogen.
I think the good news is two things one we have our toe in all of those ponds in terms of watching all that technology advancement and see how it is not only going to progress the commercialization of our commercialization through heavy duty fleet like ours, which are two distinctions.
So I think we're I think we're in a good spot there regardless what the technologies are fleet strategy as evidenced by what we've done from.
Diesel Gen. One diesel Gen. Two to CMG slash R&D is that we have the flexibility within our fleet plan to be able to pivot without really impacting the business I think Kevin one important point here about electrification is that.
It's not a surprise anybody on this call the infrastructure is simply not there yet to handle this I mean, when California is telling people with electric vehicles to not charge their vehicles last summer and I don't know what the percentage of electric vehicles in California is probably 5% if that.
We all know that the infrastructure is not prepared to handle electric vehicles. So we've chosen to make that.
It's an incrementally positive step to go to <unk> will be at 75% probably by the end of the year.
And our goal is to ultimately get to 90 presented if the technology the price point by the way is important to us im not going to be three times.
For an electric vehicle, what I pay for CG vehicle. If all of those things have worked out look we're all in for moving to EV, but but we need to see some progress on on particularly on the infrastructure and right now I don't know that were seeing any progress.
On infrastructure.
Can I ask just a follow up on that.
RMG, a CMG trucks considered.
Essentially zero because effectively you are in a unique position in that.
Also.
Produce R&D.
Landfill.
With a state like California look at your R&D fleet differently than say.
No.
Owner, operator, running a class a truck just because you're producing it on the front end as well into creating that circular.
Economy or or is that still kind of unknown in terms of how the how they might treat that.
From a progression standpoint going from diesel to <unk> is certainly going in the right direction, but I don't think that California, if it's a combustion engine I'm not sure they would define it any other way.
It's a good point, though because R&D is a renewable fuel so if youre using a renewable fuel to fuel a CMG truck.
I don't think you have to be a mathematician to figure that out it should be a net zero.
But I don't think to Johns point I don't think we look at it that way today.
Okay. Thanks.
Thanks, Thanks for the color and best of luck in 2023.
Thank you ladies sandbox our next question.
Our next question comes from the line of Sean Eastman with Keybanc. Your line is open.
Hi, Jamie I, just wanted to confirm that the guidance is intact and in particular, including the collection and disposal yield I think you guys had given us.
<unk> five 5% number just just wanted to get that confirmation.
So yes at this point, we're good with.
Each element of the guidance, though as Jim was saying earlier.
Specific to the commodity based businesses.
We have some caution around those but when we look at the yield component, we actually see.
The revenue results, including yield for Q1 being a little ahead of our plan. So we're certainly confident in that aspect of the guidance that we provided.
Okay excellent that's helpful and then.
Then.
Is there sort of a logical approach we can take to this combined recycling and renewable energy line.
That's.
Now in the revenue build I'm, just kind of scratching my head a little bit on how to.
Apply some science to the model there.
Sure.
What we intend to do there at one point, we had moved our renewable energy business into the fuel line and with some of the noise. It was creating in the fuel line, we saw value in calling that out but what we do is try and work ourselves toward providing better clarity about the key drivers of.
Our business and because renewable energy and recycling both have commodity based index.
We thought looking at those on a combined basis made some status and if you need additional color on that Ed and Heather.
Sure to get you the details that you need.
Okay. Okay helpful I'll turn it over thanks.
Sean.
Thank you.
Please standby for our next question.
Our next question comes from the line of Stephanie more with Jefferies. Your line is open.
Hi, Good morning. Thank you for the question good morning, Stephanie.
I wanted to touch on clearly have made pretty meaningful progress and SG&A reduction and just your focus on cost cutting, but maybe you could touch a little bit about if theres been any change in your approach to acquisitions as you continue to kind of balance SG&A reduction as well as acquisitions and has there been any.
The change in terms of how you look at deals the integration opportunity level of automation or other savings that you can get in with that kind of changed your M&A philosophy, a bit as you take a bit more of a cost focused approach here.
So it's a good question because.
I wouldn't say that our approach has changed.
As Youre looking at.
What makes best sense for the shareholders, but I do think to your point about being kind of an added synergy here is an important one and we are factoring that in as we look at some of these companies.
This is truly going to be a differentiator for us as we talked about in my prepared remarks, I talked about the fact that we are.
Taking cost out of our customer experience centers, because we're using a self service model now and that was not insignificant.
That is something that differentiates us from others, who simply don't have that technology in place. So it becomes a synergy for us as we.
As we acquire businesses.
No that's helpful and maybe taking that as a step further as you continue to look to do M&A as well as you move forward with CB scale cost cutting investments is the maturity for the maybe near term dilutive impact from M&A in a given period of time too.
Maybe diminish over time because of this or how are you thinking about that opportunity.
So I think what's important in giving color to the dilutive impact from the M&A that we saw in Q1. It really was twofold one in the solid waste business, we make investments in our facilities the fleet and our people right upfront and that's the cost impact that you saw.
In the first quarter for the solid waste acquisitions, and then on the recycling part of the business.
The nature of our business is in early stages, and we're making some investments there too and that cost about $6 million to the quarter just in terms of incremental spending that we did on the business. So neither of those really were seeing the full benefit of leverage on the SG&A front or <unk>.
Sorry, it wasn't that they werent seeing the benefit of the leverage on the SG&A front, we were capturing and realizing that it was more about investment in the operations in the long term viability of each of those businesses and we're making the progress that we expect to make so that they have incremental value.
Nation for both the market in the solid waste business that we acquired and then also thinking about the differentiated service model that we will now have in the recycling part of the business. Because this is a new line of business for us.
Understood very helpful. Thank you so much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Tobey Sommer with Truth. Your line is open.
Thanks.
With respect to driver retention and overall compensation in that area of your Labor Force, how do you expect that to trend.
And particularly in the macroeconomic headwinds.
And how much room for <unk>.
Improvement could there be based on the historical ranges of those metrics.
The prior downturn.
So that's a good good question. So I think if you look kind of pre pandemic through the pandemic. We went from obviously historic averages to historic lows right in terms of driver retention and turnover for obvious reasons as we exited those numbers went up past historic averages and we've been working really honestly the last two years.
Just on the wage front, but from an employee experience for us to get those numbers down and I would tell you. We've made $4 to 500 basis points of improvement in a lot of those key frontline roles and you heard me in my prepared remarks to talk about some of the the peak wage inflation, where it's moderated to now so that's clearly going in the right direction, but the biggest benefit really is is when you can stay.
Obelize the workforce those frontline folks and we've talked a lot about drivers it's our biggest population.
Your service gets better your safety gets better and overtime ratios training hours on all of those things start to go the right way and we started to see signs of that in Q1.
Thanks.
When you.
When you entertain conversations with smaller players in your M&A outreach what are you hearing from them.
The impact of higher rates in the kind of persistent required tech investments to stay competitive with the market.
I don't know that we're hearing a lot about <unk> because I'm just not sure I think they are more focused on how do they keep drivers.
On the road, we are hearing that.
And some of the companies that we've acquired are showing double the turnover that we're showing.
It's why we think there is an opportunity for us to take share continue to take share first because I think the.
The customer service products that we are providing is superior when you are able to hold onto your drivers. It makes a big difference.
That customer lifetime value.
Proposition.
So we are hearing that.
That that turnover has become a consistent and recurring problem for a lot of those companies I think the other thing that I.
Would like to mention to us.
As we think about drivers is why why it's imperative that we bring technology to this this labor pool, it's a shrinking labor pool, we've talked about it a lot.
Gen Z doesn't want to drive trucks, the way baby Boomers Gen X did so how do we take advantage of that and the way we take advantage of it is by bringing technology.
Two to squeeze 510, maybe even 15% optimization out and that's exactly what we're doing in building an optimization tool that understands absolutely the best route to take it understands.
It understands things like location of cards. We finally, now know where all of our assets are under.
I understand the expertise of drivers I mean, there's a whole bunch of factors that go into a full optimization.
And I guarantee there is not anybody else out there that's able to do that it is not an.
Inexpensive to two to optimize that but once we optimize it then we become less reliant on on labor and it's a labor intensive business and we have 25% turnover in those drivers how do I take advantage of that and it's got to be through technology.
Thank you.
Thank you Lee.
Please standby for our next question.
Our next question comes from the line of Tony Bancroft with Gabelli. Your line is open.
Thanks for the thanks for the question.
Just a quick one would you review.
Quickly review.
Sort of the impact potential impact from P. Five may or may not have on.
Yeah.
The cost of landfills and sort of how I know theres going be some rulings or some hearings coming out here.
Over the next few months about it but how do you see that playing out and how do you see that impacting your business.
Yes. So we've said that we think P forces is more of an opportunity than a risk for us.
It is kind of a ubiquitous and these these landfills in and then the material that comes into them.
It has been at this points EPA.
EPA has designated <unk> as a hazardous material and so.
I think theyre going to have to understand the fact that hazardous sites are there are far fewer of them than there are not as sites.
So I think EPA is still trying to kind of work their way through <unk>.
<unk>.
It is worth saying that we view this as a big opportunity for us and for all <unk> companies.
Once they've kind of finally decided exactly how this is going to be handled.
Thanks, so much Jim congratulations thank you.
Thank you please standby for our next question.
Our next question comes from the line of Noah Kaye with Oppenheimer. Your line is open.
Good morning first question I guess is how to think about key fuel rolling over in terms of impacts to EBITDA margins over the rest of the year you have such a high percentage of the fleet on natural gas versus the peers. So maybe it doesn't impact the cost line as much but perhaps the surcharge line. If you can just give us some <unk>.
<unk>.
How would it be modeling that or how to be thinking about that would be helpful. Yes. It's a great question. So in terms of the impact I think when you look at 2022.
The IRG table that we do I think is the best.
Data point for that fuel was a really significant contributor and we've already seen in Q1, our fuel surcharge revenue in Q1 versus Q4 of last year was less than half on a year over or on a sequential basis and.
So what we are seeing is that that revenue decline should actually benefit the margin side of the business. We didn't really see any meaningful margin impact in the first quarter, but we do expect that we will see some margin impact over the remainder of the year. We're also taking some imports.
<unk> steps that we think are beneficial in terms of looking at the overall cost structure of the organization that is dependent upon the fact that we are at 75% CMG for fleet and delivery, but when we look at our consumption. We don't just look at the collection line of business, we look at the heavy equipment at our landfills.
And all of that so we're looking at making sure that we're not just doing a diesel based fuel surcharge were doing a blended surcharge and some of those changes our customers are going to begin to see in the second quarter. So we're confident that we're going to maintain that pass through model that we've had.
Over the last many many years.
Well look a little bit different in future quarters, both because of the lapping of the really significant increases in diesel that we saw a year ago, but also because we were taking some structural changes with how we build that to our customers.
That's really interesting and I mean, there's benefits here potentially the customers as well because historically.
I mean.
I forget the last few years, but historically <unk> fuel prices have been more stable relatively.
So would that change could be received positively by customers as maybe a way to help reduce volatility to them on the cost side, we absolutely see that as something that our customers will receive well and our customers already like the fact that that <unk> truck.
Rolling down the street is quieter than the diesel vehicle, we see this as something else that the customers will receive is a positive from wm investing economically and environmentally beneficially.
On a differentiated fleet to service.
Great and then just on recycling just trying to get some better gauges are indicators of demand. Maybe you can talk to your sense of the mills inventory position on recycled fiber, maybe you can characterize the flow of impairments.
Inbounds Im guessing kind of lay.
<unk> you probably didn't hear a lot of phones ringing in terms of request for product.
How is it trending now.
I think we've.
<unk> benefited from we've talked a lot about our brokerage business being part of the recycling portfolio and what Thats always thats added to us as a benefit is our ability to move the materials. So we don't have any issue moving the material were bringing in and even where were growing volumes were still able to move that material I think the interesting thing Jim I think <unk> touched on this is that there are some domestic capacity.
That's opening up here this year and we've seen a little bit of positive movement here just late in the last handful of weeks on some of the fiber pricing.
Jim mentioned that overall the whole basket of goods is has moved up here a little bit as we exited Q4 into Q1, and then even exiting Q1 into Q2.
Now it also helps that China has opened back up and while we don't send a lot of stuffs trade to China anymore. They do affect worldwide demand and when China was closed down with their COVID-19 policy that hurt worldwide demand now that they've chosen to reopen their economy that is helping and that'll help us out as well.
Okay makes sense. Thank you.
Yes.
Thank you.
Ladies and gentlemen, im showing no further questions in the queue.
I'd now like to turn the call back to Jim Fish, President and CEO for closing remarks.
Alright, thank you.
I guess just to conclude here you've heard that they were on track for another solid year.
Right on.
On plan for the first quarter.
Looking forward to seeing a lot of you next week in New Orleans.
Should be should be doable. So thanks for joining us This morning, and we'll see you next week.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.