Q2 2023 Waste Management Inc Earnings Call
Good day and thank you for standing by welcome to the W. M Second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need a press star one one on your telephone you will then hear an automated message advising you got your hand is raised to withdraw your question. Please press star. One again. Please be advised today's conference is being recorded I would now like to hand, the conference over to your speaker today.
Eagles senior director of Investor Relations. Please go ahead.
Thank you Michelle.
Everyone. Thank you for joining us for our second 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 ranking executive Vice President and Chief Financial Officer.
Your prepared comments from each of them today, Jim will.
A couple of high level financials and provide a strategic update.
Cover an operating overview and Davita will cover the details on the financials.
Before we get started please note that we have filed a form 8-K. This morning.
Our earnings press release and is available on our website at Www Wm Dot com.
The form 8-K, the press release and the schedules to the press release include important information.
During the call you'll 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.
These risks and uncertainties are discussed in today's press release, and our filings with the SEC, including our most recent Form 10-K.
John will discuss the 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 to being able to discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons unless otherwise stated will be with the second quarter of 2022.
Net income EPS operating EBITDA and margin and operating expense and margin results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations.
These adjusted measures. In addition to free cash flow are non-GAAP measures.
Please refer to the earnings press release, and tables, which can be found on the company's website at www 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 the Wm website at Www Dot investors Wm Dot com.
Time sensitive information provided during today's call, which is occurring on July 26, 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 Wm is prohibited.
I'll turn the call over to WNS, President and CEO , Jim fish.
Thanks, Ed and thank you all for joining us.
Our team continues to advance our 2023 priorities.
Okay, including increasing the profitability of our business through strong price discipline and an optimized cost structure.
As I said in February 2023 will be a year of pricing and cost control.
It's a year of continuing to set ourselves up for the long term by delivering on what we can control.
In the second quarter, our adjusted operating EBITDA margin expanded 60 basis points.
Given by pricing in the collection and disposal business and diligent SG&A cost control.
We delivered this result, despite some things that we can't control stubborn cost inflation slower event, driven volumes and lower than expected renewable energy prices.
Notably.
Clean up volumes from Hurricane Ian came in significantly lower than anticipated, which had a $9 million of operating EBITDA impact in the quarter.
We're pleased with our pricing results for the first half of the year as our team is executing well to ensure that our pricing is keeping pace with the pressure from rising costs.
For all our volumes are also tracking at or above our expectations.
Though the mix of volumes across our businesses is different than we had planned.
And then driven landfill and industrial volumes in the quarter were lower than we anticipated.
Which we see as a short term moderation in this business.
Some customers seem to be taking a more cautious wait and see approach regarding the timing of large jobs, given the economic backdrop with many anticipated projects moving into 2024.
Our pipeline remains strong so we view this as a temporary shift in project timing.
The impact to our special waste in construction and demolition volumes has been mitigated by strong growth in our strategic accounts business where.
We continue to differentiate our service offering.
We're overcoming margin pressure from this temporary change in volume mix with continued momentum in pricing optimization costs and efficiency improvements and Youll hear more from John and Divina about the success, we're having in managing our operating costs and SG&A.
Where we have opportunities ahead.
Turning to recycling, we're now expecting a slower than planned recover in recycled commodity prices and.
In the second half outlook.
The investments, we're making in automating our recycling facilities position us well.
And any commodity market environment.
As they drive lower labor cost.
Assessing costs improved efficiency and.
Enhanced material quality.
In the second quarter, our fully automated recycling facilities deliver differentiated results relative to the rest of the network with 33% lower labor cost per ton at 18% lower total operating cost per ton.
During the quarter. We're pleased to have opened a new recycling facility in the greater Toronto area, and also completed technology and automation upgrades at an existing facility in Arizona.
Recycling as a service with strong customer demand and our intentional shift to a fee for service business model as well as our high return on technology investments make it a profitable business for Wm in any economic environment with margins now well above our prior commodity cycle lows.
On the renewable energy front, we opened our eco Vista renewable natural gas facility in Arkansas during the quarter. The six Wm owned R&D facility.
And the second of our 20 planned projects and our sustainability growth program.
Last month, the EPA announced its three year renewable fuel standard rule.
Which provides strong demand and visibility to the market for renewable fuel standard credits or rents.
This robust demand provides support for our blended average pricing assumption of $26 per btu used to develop our investment strategy and strengthens the case for potential upside.
Shifting to our full year outlook, we are updating our 2023 guidance ranges to consider first half results in a slower recovery in commodity prices in the second half of the year. We now expected adjusted operating EBITDA growth of five 7% at the midpoint of our guidance range, which is still well within the 5% to 7% long term growth range that we.
Aided in May of 2019 Davina.
The Avino will walk through the key pieces of the outlook in further detail.
The Wm team continues to step up to the challenges of.
Each day, while at the same time progressing investments in our business that that positions us to further differentiate our ended our industry, leading asset network and capabilities and reduce our cost structure.
I want to thank each of our team members for their hard work and dedication I will now turn the call over to John to discuss our operational results for the quarter.
Thanks, Jim and good morning.
Pricing remained a bright spot in the second quarter as we continue to execute on our revenue management programs to recover cost increases and improve margins, our second quarter organic revenue growth in the collection and disposal business was 6%.
This growth was led by core price of six 9% with collection and disposal yield of five 8%.
We have and continue to emphasize the importance of post collection pricing and in Q2, we delivered yield of seven 5% of our transfer stations and 6% for landfill MSW bolt improvements in the growth rates from last year.
Our team's collective focus continues to be on maximizing customer lifetime value that focus led to second quarter turn improving to eight 3%.
This lower churn has allowed us to convert more core price into yield driving our full year outlook for collection and disposal yield to increase to more than five 5%.
Looking at volumes second quarter collection and disposal volume grew by 2%.
As expected volume growth was weighted to the landfill line of business with modest declines in the collection business.
Mr. MSW volumes stood out with an increase of almost 4% as Jim mentioned some of our event driven landfill volumes, particularly special waste tons have been tracking below our expectations and below the very strong levels. We saw in 2022.
Our collection volumes were down modestly in the quarter due to the intentional steps we continue to take to price every contract to achieve acceptable returns as well as the impact of lower volumes from temporary roll off.
Net new business and net service increases were firmly positive and improved from first quarter 2023 levels underscoring that commercial conditions remained solid.
No collection volumes are down both revenue and operating EBITDA grew in each line of business demonstrating that we are prioritizing profitable volume growth for full year. We continue to expect collection in disposal volumes to be flat at the midpoint of our guidance.
Turning to operating expenses, we realized benefits from our optimization efforts in the second quarter, leading to 20 basis points of improvement in operating expenses as a percent percentage of revenue to 62, 2%.
The improvements that we made in Q2 are being partially offset by higher costs due to inflation.
While we experienced some impact of lingering inflation into Q2 signs of easing continued as the quarter progressed the areas experienced the most pressure our labor costs and repair and maintenance cost there is cause for optimism in both of these categories labor costs have continued to moderate during the second quarter settling in the mid single digit range from the double digit level.
That we have seen over the last year.
This improvement can be attributed to better employee retention as evidenced by over 50% fewer driver openings in driver turnover, improving 250 basis points compared to the same period in 2022.
We have robust strategies in place to optimize labor efficiency, particularly in our collection line of business.
Which we expect to further diminish these cost pressures as the year progresses.
We are seeing the benefits of these efforts as we progress through the second quarter with June marking the lowest cost to serve month of the quarter. This is a promising sign as we move through the remainder of the year.
As noted another significant factor impacting our operating cost has been repair and maintenance expenses the effects of not receiving a full allotment of trucks over the last few years are still being felt however, the good news is we are now receiving more trucks and it's leading to improved cost since.
Since the beginning of the year, our maintenance cost per unit have either improved or remained stable across all collection lines of business similar to our approach to labor costs. We have comprehensive plans in place to drive continued improvement in our repair and maintenance performance as we progress through the rest of 2023.
Our efforts in these two key areas as well as the broader operating expense categories give us confidence that we can continue to improve overall operating costs as a percentage of revenue as we progress through 2023.
I want to thank the entire Wm team for continuing to provide safe and reliable service to our customers I know they are all working hard to deliver strong results through the remainder of this year and beyond with that I'll turn the call over to Divina to discuss our financial results and guidance in further detail.
Thanks, John and good morning.
First half of 2023, and our revised outlook for the full year is best framed as a story with two primary themes one.
One of executing well on our top priorities priorities to profitably grow our business and the other a pressure from market factors beyond our control that we are working to ensure we navigate from a position of strength.
Our team's diligent efforts delivered two particularly strong outcomes in the second quarter first revenue growth from price and our focus on cost optimization translated into an increase in collection and disposal operating EBITDA of $95 million or six 2% in the quarter.
Second SG&A cost as a percentage of revenue improved by 30 basis points to nine 1% and this is the best results in our company's history.
Commitment to managing discretionary spending and investing in automation to reduce our cost of service paying off.
We're seeing strong outcomes from our investment in our customer experience model that leverages technology to communicate with customers in their channel of choice.
Feedback has been strong, giving us confidence that with these investments.
Permanently reduced our SG&A cost structure, and we will continue to drive improved customer satisfaction that will only bolster customer lifetime value from here.
Organic growth in our collection and disposal business and our focus on SG&A optimization delivered 50 basis points of operating EBITDA margin expansion in the quarter.
Operating EBITDA margin improved 60 basis points. Overall, so you can see that these two things delivered almost all of the strong result.
This is what gives us confidence in our ability to continue to grow margin in the back half of the year and into 2024.
Year to date cash flow from operations was about $2 $1 billion.
As expected higher cash interest taxes, and incentive compensation payments more than offset the benefit of operating EBITDA growth in the first half of the year.
We expect to see those impacts lessen in the second half.
2023.
Capital spending in the first six months of the year totaled almost $1 2 billion.
With $963 million related to normal course capital to support our business.
$217 million of spending on sustainability growth projects.
As Jim mentioned, we're pleased with the continued progress on our sustainability growth program with three new projects coming on line. So far this year.
However, customary construction and permitting delays for certain recycling and renewable energy projects will push about $200 million of our plan 2023 sustainability growth capital into future years.
Free cash flow through the first half of the year with $940 million and free cash flow before sustainability growth investments with $1 billion $157 million.
Year to date, we've returned $572 million to shareholders through dividends, and we've repurchased $620 million of our stock.
Dividends will total a little more than $1 $1 billion. This year and we expect to repurchase about one 5 billion of our shares over the course of the year.
Our leverage ratio at the end of the quarter was two eight times, which is well within our targeted ratio of between two five and three times.
About 21% of our total debt portfolio is at variable rates and our pre tax weighted average cost of debt for the quarter was about three 8%.
Our balance sheet is strong and we remain well positioned to fund growth.
Turning to our updated 2023 guidance, we now expect revenue growth of between three five and $4 two 5%.
The revision from our initial expectations as entirely related to commodity prices in our recycling and renewable energy businesses and the pace of contributions relative to plan for our recycling acquisition.
The key takeaway here is that core price yield and volume outlook in our collection and disposal business are intact and even performing slightly ahead of our initial expectation.
We now expect adjusted operating EBITDA to be in the range of $5 775 to $5 $8 $75 billion.
Which is the $75 million decrease at the midpoint.
About $50 million of the revised outlook relates to our performance in the first half of the year relative to our plan and $20 million relates to a slower recovery in recycled commodity prices in the back half of the year relative to our expectation.
The operating EBITDA shortfall in the first half of the year, primarily relates to three things.
Inflationary cost pressure that has taken longer to abate in 2023 than we expected as softening in event driven volumes at our landfills and lower than expected commodity prices and our renewable energy business.
These are market driven pressures, giving us confidence that our collective performance on the Companys top priorities over the first half of the year delivered the intended outcomes.
With the strength of our collection and disposal operations and the success from our SG&A optimization efforts.
2023, we will again deliver on our target of growing operating EBITDA by 5% to 7% annually.
In addition, we expect to expand our operating EBITDA margin 40 to 60 basis points for the year.
Both measures demonstrate the resilience of solid waste and the benefits of pricing discipline focused differentiation and cost optimization to drive long term growth.
In closing the Wm team is delivering well to safely and reliably serve our customers and to optimize our path. We will deliver another year of strong financial growth in 2023 and position ourselves for continued success on the road ahead.
I can't thank our hardworking team members enough for all of their contributions to our success with that Michelle Let's open the line for questions.
Thank you as a reminder to ask a question at this time. 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 standby, while we compile the Q&A roster.
Okay.
Our first question is going to come from the line of Tyler Brown with Raymond James Your line is open. Please go ahead.
Hey, good morning.
Good morning.
Hey, so.
Moving around in the margins, but can we just talk a little bit about that margin walk in more detail kind of how we bridge that 60 basis points year over year, maybe talk about fuels commodity the CMG tax credits emanating I know, there's quite a bit in there.
Yes, you're right Tyler there are a lot of moving pieces.
Miller to what we talked about in the first quarter.
When you combine recycling and renewable energy prices that had a negative impact to margin of about 30 to 40 basis points.
Again, the dilutive impact of M&A. This is half recycling and have solid waste was about 40 basis points and then what we had as an offset from fuel that you didn't see in the first quarter or so.
We're really pleased that when you look at those two things, which are more timing and commodity related and focus on the real substance of the margin expansion that we produced in the quarter that is two things and it's solid waste and it is SG&A cost optimization.
Right, so maybe fuel kind of offset the commodities and M&A is that kind of what you're saying exactly.
Okay, Perfect and then I think last quarter, you guys did talk about 4% to 5% unit cost inflation for fiscal 'twenty three.
I'm just curious if that number still feels about right or a few days coming in a touch higher and then how should we think about Q3 margins will they be up something like 50 to 70 basis points sequentially and then maybe tick down in Q4, just to help us with the modeling.
So Tyler I'll start and then I'll leave the second parts of maybe the Divina, but I would tell you that when I look at it probably the best barometer for that inflation question as probably labor I think the good news is you heard my prepared remarks. It continues to moderate and we came down I think we're right around 6% for the quarter, which is obviously, a tad higher than what we had projected and a number that you referenced but I think there are good.
News is is that we continue to see that moderate and it continue to moderate through the quarter as we looked at each of the progressive months as we're anniversarying some of the peak labor increases.
The increase was the second part would be on the MSR side.
And as you heard also in my prepared remarks.
Good news is that we are on track to receive about 90% of our trucks. This year as opposed to the western half of the last few years. So that's another place where we've seen a little bit of persistence and inflation, but as evidenced by my commentary and Devine is we feel good about the balance of the year and our ability to continue to drive opex down.
And on the second part of your question Tyler when we look at 28, 7% in Q2 were really confident in our ability to deliver 29% in the back half of the year and the EBITDA margin and see incremental benefit we expect to come from the traditional solid waste side that John just discussed.
But what we're really looking at here is long term being able to target 29% that is.
Based on 62% operating expenses as a percentage of revenue and 9% SG&A as a percentage of revenue and we think that Thats just when we look at when I say long term that that's what we think we can start to produce in 2024 and there is upside potential from there.
Excellent very good and then my last one real quick Jim It sounds like the $740 million of incremental EBITDA from Orange and recycling is intact.
You'd mentioned that the timing may fluctuate and we did have the $200 million Capex deferrals. So at this point.
How much incremental EBITDA are you expecting in 'twenty four from those if I look back at the Investor Day.
Is something like $225 million incremental is that still the case or has that been pushed out a little bit. Thank you.
Yes, Thanks, Tyler look as far as the and number four for both R&D and recycling, which was $740 million.
We're still comfortable that the interim years were really designed to kind of give a.
Some insight into the buildup of that we knew things would change whether it was was timing of capex supply chain related.
Third party delays permitting things like that so so what we'll do is update that number the 2024 number when we give guidance.
To incorporate some of those shifts that have taken place over the last few months.
Okay. That's helpful. Thank you.
Thank you and one moment for our next question.
Our next question comes from the line of Toni Kaplan with Morgan Stanley . Your line is open. Please go ahead.
Thanks, So much you bet.
Net collection and disposal will exceed five 5%. This year, we did see a little bit of a T cell and <unk> can you just talk about what should cause that to.
Sort of accelerate from this level.
Hey, good morning, Tony.
I think the one thing I would point to is when you look at the conversion rate between core price and yield Thats, where we really have seen an improvement as we looked at the first two quarters of the year and now we're converting close to 85% of what we're putting through our core price into yield and that's given us confidence that as we go through the back half of the year, we're going to see something better than the five 5% we originally.
I did too.
Terrific.
I wanted to ask a little bit more on the SG&A optimization, thanks for calling that out.
Just any additional color on on what's going on there and how much maybe you have left to do with regard to that.
Sure. So as I mentioned in my prepared remarks, we've seen really strong traction, particularly in our customer experience part of our back office and that really underpins the success of our automation and optimization efforts across the business.
That's been the most significant driver of the change in <unk>.
SG&A optimization overall, we expect similar things to happen in other parts of our business as well and so.
While we're looking at a 9% SG&A number Jim and I talk about the fact that either of US. If we had said that we could achieve that when we both started the CFO position. We would have told you that was a really hard thing to achieve so we're pleased to be at this level.
How much more room there isn't it.
To be determined but what I think you see here is WNS commitment to continuous improvement and we're seeing success.
Really motivate our team to figure out how to leverage the success in other parts of our business.
Terrific. Thanks, a lot.
Thank you.
And one moment.
Our next question comes from the line of Brian <unk> with Citi. Your line is open. Please go ahead.
Good morning, Thanks for taking the question.
Just following up on Tonys question until there's a comment in the press release prepared remarks about exceeding our yield growth per se. So what level of yield growth do you assume that the midpoint of your revenue guidance is at five 5% or is that above 5% just any detail you can kind of what's baked into the guidance would be great.
Sure, it's specifically five 6% as we're looking at at the midpoint.
And that's about a 20 basis point increase from where we started the year.
Got it got it thank you and I appreciate the updated view on the recycled commodity basket can.
Can you maybe just provide some detail on what the average was.
During Q2, or maybe where you are.
In June July just trying to think about how much equipment, we need to see in the second half.
Hi, Brian .
I'll, let Tara hemmer, she's sitting here with us I'll, let her take that for you.
Excellent so our commodity price for recycling for Q2 was $60 and I think what you have going on in the second half of the year is really a tale of two different commodity types.
If you think about our fiber.
Pricing.
We're expecting a slow ramp in fiber pricing and thats really being driven by some mill capacity coming online domestically. The bigger story really is on the non fiber pricing and related to plastics, which is a smaller part of our volume, but higher value commodity and we've seen price.
The decline roughly 30% to 55% from May to July so that's really what's driving our recycled commodity price outlook for the second half of the year.
We're expecting the second half of the year to now be about $60 a tonne. So really the same as Q2.
Okay got it thanks, a lot I'll turn it over.
Okay.
Thank you one moment please.
Our next question comes from the line of Michael Hoffman with Stifel. Your line is open. Please go ahead hi.
Good morning, Jim Divina, Ed John and Tara.
I was in steaming Houston yesterday, I don't know how you want to live there in the summer.
So davina.
The value of.
The assumption.
For a sequential improvement in all things come out so not just recycling recycling rins Nat gas.
Electricity in the original $5 9 billion.
Yes, so we look at that as a 40 million dollar.
What I would say is we were expecting about an 85 million dollar headwind from commodity price impact in the recycling and renewable energy businesses that is now expected to be more like $125 million at the midpoint. So about a 40 million dollar headwind relative to <unk>.
Mishel expectations with half of that in the front half of the year and that's related to the renewable energy businesses and really specifically in electricity and Nat gas prices, specifically and then on the back half of the year as Tara just articulated pressure from recycling commodity prices.
Particularly plastic being lower than our expectations, which is causing a $20 million decline in the back half of 'twenty three.
Okay.
Ask that question very well you all in your prepared comments I think are inferring this but I'm trying to piece it out of numbers.
<unk> got a mulligan and we went back to February and you were giving guidance and you didn't have any of the sequential improvement.
It would've been mid point had been I think it's like $5 7 billion, which means you were raising guidance in <unk> because of the strength of garbage.
No I think Thats I think youre right on there Michael I mean, I think if we'd had a crystal ball and said hey commodity prices are not going to improve the way we thought they would in the back half of the year, if we'd known that natural gas pricing was going to come down significantly, which we didn't expect that our electricity would come down or even rent pricing would come down in the front half obviously it is <unk>.
Proved in June but.
If we had known all of those things clearly, we would've given lower guidance that we gave but.
But still as I said in my prepared remarks, and we are still coming in at five 7%, which is in that range of 5% to 7% EBITDA growth and by the way when we gave that back in 2019 that assumed average commodity prices, we are 45%, 40% under average commodity prices, so I feel well.
I walk away from this quarter.
Initially and I'm not going to sit here and tell you I wasn't disappointed when I first looked at the numbers.
But then I start looking at what we're controlling and thinking gosh normally when you crush it on SG&A and pricing and margins normally that's a beat and raise why are we having to lower and its all what we've just been talking about it's all of these commodity based things that are sometimes hard to predict.
And we will use history to predict for example commodity price rebound.
Got to come back, it's just going to be 2020 for now so so I think youre absolutely right. The guidance would have been lower still would have been within the 5% to 7% range, but but I walk away feeling pretty good about things might sound crazy in today, but I'll walk away feeling good that we're that those things that we're controlling we're doing a darn good job of it.
Alright, so I'm repeating the obvious but core recurring collection and disposal is performing as planned or better.
That's the conclusion, yes, that's right I mean actually I would say you could argue a little better Divina just talked about SG&A being 9% I would tell you when I was CFO .
So they are wondering how are we getting close to 110.
Thanks.
Yes.
So she's got bragging rights.
So just a good way better at this and I was on.
Special waste John are you below a normal baseline as well. So this is not only didn't get hurricanes, but.
The normal sort of recurring stuff that happens over and over again, even though it's not terribly predictable theres a certain baseline are you below the baseline to because of the deferrals. So two things Michael first answers I don't think no. We're not I would tell you that on the hurricane piece I mean, when you look back that was a little bit of a headwind in the first half of the year a little bit more in Q2, but again when we were predicting what we're going to do.
Do back last year with respect to Ian.
We've cleaned up a lot of it is just moderated a little bit more in the first half and a little bit more in the second half.
So that's answer number one I think on the special waste side I've done a little bit a lot of homework on this and talk to the team here I would tell you no I don't think were below the baseline I think what we saw is historic highs in the first two quarters of last year and special waste and I'm going back two.
<unk> 2017, I think as long as those are two of the strongest quarters. We've had in fact Q2 I think it was our strongest quarter in recent history for for special waste.
And really it was a handful of events a little bit in the Rustbelt, we saw a little bit of moderation on some really big projects, but when you look outside of that I'm pretty confident about what's going on in special waste.
I think Michael it probably makes sense that I mentioned that these.
A lot of these companies went into somewhat of a holding pattern here.
While they got better visibility on the economy and you think about what was going on.
Potential for a real banking crisis here, so do they put a little bit of a lock on the check book with some of these projects, which they have timing discretion on they will do those projects. The pipeline is still strong we've been talking about that for several quarters still strong pipeline.
Really good customers that are all still there, but they just put a put a lock down on some of these projects and so down.
The $1 $9 million year over year tonnes in special waste and <unk> for the first half and down very significantly versus our budget that mattered.
But again the good news is all of these things that were kind of out of our control.
Will reappear so how does if theyre not going to do those projects. They will do them, it's not as if commodity prices won't come back. They will so so that's why I'm walking out of here feeling better about this than you might think okay and then Tara.
How does the delay and you may have answered this but so much information was given I missed it how does the delay in spending impact capturing it.
<unk> since that is time sensitive.
It doesn't impact it at all where we're confident that we've done the work that we need to do to ensure that we get the benefit of the ITC.
And then what are the probability that you can work it up from 30% to 50 based on content and all that stuff.
So we're actively looking at which locations can get the energy community benefit, which would take it up to 50% and then also looking at domestic content, which would apply to 17 of the 20, we don't have definitive confirmation there working closely with davina tax team on that.
But I hope to have some more information perhaps later this year early not.
Okay. So that's another upside pleasant thing instead of spending $1 2 billion youre going to spend anywhere from 700 to 500 to 790, what I can tell you is our teams have been working really hard to figure out how we can maximize the benefit across the portfolio. So anywhere where we think we can get the 40%.
The 50% Theyre doing the work to go.
Okay Cool and then davina.
If you said it I missed it what was the impact of less pass through fees on margins.
So on the fuel surcharge.
The impact was about 60 basis points, Okay, and then what are the chances we might get segment reporting with more detail Chris because this is a learned experience from what happened in this quarter.
Yeah, absolutely. So what I think is important as you hear the close coordination that's happening between tariff team and my team on every aspect of growing this portfolio and I would say the systems processes financial reporting associated with the business is something that we're bolstering at the same time that were built.
<unk> B asset network, and so we have expectations that we'll be able to build SEC quality level of financial information in the near term and that's our goal and we'll keep working toward it over the course of the rest of this year terrific. Thank you so much.
Okay, Mike Thank you.
Thank you one moment.
Our next question comes from the line of.
Noah Kaye with Oppenheimer. Your line is open. Please go ahead.
Thanks, so much I'll pick it up there on the sustainability investments and.
To be clear permitting delays are absolutely nothing new in the R&D industry and I think we understand why.
I'd be curious for your color on the development environment to what extent any incremental challenges are presenting either from a permitting and construction perspective, how it sort of temporary do you view this.
In this growing industry.
Well I think it's important to set some context here we have.
A large number of projects in flight at the same time, and we're really taking a portfolio based view. If you think about it some of them are going to delay some of them, we're working to accelerate if you.
Think about what's happening in 2024, we will have well over 10 projects under construction and so we're working with utilities to figure out how we can advance our interconnect.
We're working with local permitting agencies to ensure that we get building permits. So a lot of this is like you said really normal course.
Things that happen on large construction.
Programs and projects and we're going to continue to evaluate and Thats why we gave later this year really.
When we announced.
Announce Q4 will give a bit more color on what the impact will be.
Okay, and just a follow up around the rent assumptions for the full year.
Obviously.
For the first half of the year South the original guide kind of in the low twos.
<unk> being north of $3 now just is there some sort of impact to the blended average for the year from hedging.
So can we can tease that out.
Could there still possibly a little bit of upside from from where returns are penciling out today.
Lastly, the right way to look at it. So it really is a tale of two halves and if you think about the second half of the year with RIN prices now at around $3 you have to remember that we've been selling ratably over the course of the year. So we had some of our volume locked in for the SEC.
And half of the year, but on a blended average basis, we expect the second half of the year to be more like 270.
Okay Super helpful. And then I guess, a question for perhaps Jim and John If you.
If you look at the disparity in volumes between MSW.
In the collection lines I mean, what is the story that that tells obviously you went into some of the detail earlier on special waste around.
Tough comps and some of the pocket book deferrals, but just just looking at that disparity help.
Help us make sense of it.
Well, it's a little bit hard to tell what is causing the disparity I mean, I think there's a number of different factors you might look at.
Even the kind of the commercial real estate market in downtowns.
<unk>.
Have declined a bit because we're.
From home movement has taken hold and kind of held there since COVID-19.
If you look at <unk>.
MSW MSW volumes were quite good, but what may be more encouraging as an MSW price was very good I mean forever, we talked about the fact that we werent able to get price on MSW and MSW prices is sequentially up it's up significantly year over year.
So.
So while we're getting MSW volume, we're also getting getting MSW price and that is very encouraging for us.
I'm not overly concerned with with roll off volume being down some of it is related to the use of special waste projects.
Commercial commercial volume is kind of what we expected kind of flattish maybe a little bit down and then resi is a bit by design I mean, we lost a few contracts, but that was because we werent willing to go where.
Where they wanted us to go in order to retain them. So I think we're from a volume standpoint, we're basically where we expected. It's just that there was a bit of a shift, especially as you thought.
More about our national accounts business I mentioned that in my prepared remarks, but.
That business is doing very well, we are truly differentiating ourselves there.
Hence the pickup in national accounts, but it does come at a different margin than for example, the special waste business. So we've talked about the only thing on.
Frank go ahead, John Sorry, plain residential well and if you look at residential and you saw it in the back if you look at the 4% volume versus a revenue improvement we've seen a similar.
A similar trend there last couple of quarters, we try and right size, our business and get continue to get those margins up.
On the commercial side I did go back and looked at what printed in terms of the volume and if you net out some of the franchise impact. In addition to a one national account loss, we talked about the we're actually anniversarying Ironically and at the same time.
Putting about 15000 containers back on the street to take that business back we actually ended up about 2% positive for the quarter. So there's some noise in there and I'm sorry for the level of granularity, but I think that's why you hear from Jim and I have some confidence in our answer to you.
No. We appreciate that granularity thanks, so much.
Okay.
Thank you and one moment for our next question.
Our next question comes from the line of Sean Eastman with Keybanc capital markets. Your line is open. Please go ahead.
Hi, everyone. Thanks for taking my questions I, just wanted to come back to the confidence in that core of 5% to 7% EBITDA growth going into next year I Wonder if that.
Just in light of.
The great pricing story, good signs on inflation from a from an opex trend perspective more opportunity on the SG&A cost optimization.
Is that is that a conservative range going into next year in light of how the model is setting up over.
Over the next 12 to 24 months in your view.
I guess based on this quarter I wouldn't say it was conservative I don't know.
Look I think you said this quarter was the commodities right.
About.
I'm kind of half kidding here, but look I think the 5% to 7% that we gave in 19 is a good range, but those components that you talked about we're feeling very confident in those I mean, SG&A we've talked about.
<unk> has been a very good story for US and continues to be a good story for us Opex, John talked a lot about opex today and well, while we had maybe a <unk>.
Little more stubborn inflation in the front half, we're starting to see some moderation as you said, we're starting to see things like training hours come down we're starting to see over time.
Come down a bit so we're getting efficiency improvements cost per unit on maintenance truck deliveries all of those things cause us to be fairly optimistic and Divina mentioned, 29% margins as it is a decent jumping off point and look I would say, yes, we've talked about 30% being a number that we felt was achievable for probably the last.
A couple of years now, we're finally getting to a point, where we say okay. We really do believe that I mean, we're looking at 60 basis points of improvement in margins in the face of some really strong headwinds that were a bit out of our control. So so we'll give you a lot more detail on that as we as we give guidance, but I would tell you that.
Barring a big downturn in the economy that 5% to 7% still looks like a very good range for us.
Okay. Thanks for that Jim.
It sounds like maybe stay tuned on this but.
In terms of the 200 million of sustainability gross capex that has slid.
For now is it a good assumption to layer that into.
<unk>.
<unk>.
Prior expectation for 2020 forward, just kind of layer that 200 million on top or is that not the right way to think about it any any sort.
Sort of preliminary thoughts on that would be helpful.
Yes, Sean I think youre thinking about it the right way so layering that on top of what we plan for 'twenty. Four is the best view that we have right now we'll give more clarity on that when we gave 24 guidance, but based on our expectations right. Now I think what's important for you all to hear is that the teams are working really hard to accelerate.
<unk>, where we can because the returns on these are so strong in a three year payback period means that we want to get these facilities up and running as quickly as possible. So while there are some places where we're seeing delays and deferrals like you said there are others, where we're working to see what we can accelerate so right.
Right now our best outlook is to layer the $200 million onto the prior outlook for 'twenty four.
Understood Thanks very much.
Thank you.
Thank you and one moment please.
Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open. Please go ahead.
Yes, hi, good morning, everyone.
Good morning.
Jim Carrey.
Can I ask you your views on the Epa's outlook for.
Landfill gas really interesting decoupling from other credit classes, so landfill gas.
It really has to ramp up to hit their targets based on what Youre seeing do you think the transportation fleet that consumes natural gas was on pace to grow fast enough to absorb those credits.
Given the visibility.
The requirements lay out for your business.
How does that impact the potential shadow pipeline beyond the 20 initial projects that we discussed at analyst day.
I'll give a little bit and then I'll take I'll, let <unk> answer the rest of it I do believe that there is plenty of demand out there. So from that standpoint, I mean, theres been a little bit of discussion I've heard.
Well are you going to kind of a run up against the ceiling here in terms of demand and I think the answer is there is plenty of demand here as we think about.
Natural gas fleets for example, I mean, our natural gasoline is about 70% of routed vehicles. So I think taro I'll, let you kind of give a bit more detail, but I feel.
Domestic about the demand side of this.
Yeah, and just to add a little bit of color on to that if you think about what the EPA did by setting a multiyear renewable volume obligation. It did two key things.
One is they raised the volume so that provided a strong demand signal and two they provided multiyear certainty and thats something that obligated parties like refinery refiners were looking for and so are the producers like Wm.
We really feel like there's a strong demand signal from that and it has a halo effect into the voluntary market. We're seeing a lot more interest in the voluntary market and we're actively working with our teams.
To figure out what's the right way to transact going forward.
And so to that point given the visibility on a multiyear basis. How are you folks thinking about the pipeline beyond the initial 20 projects as a result.
Are we.
Looking at potentially accelerating the next batch of projects beyond <unk> 'twenty.
We absolutely have a pipeline of projects that goes beyond the 'twenty, we havent yet determined how we're going to approach that pipeline. So we'll provide more information down the road.
But a lot of opportunity I think about our landfill gas.
Phenomenal resource and something that we think we can monetize long term.
Super.
I just wanted to ask just to make sure I'm. The same page with you if I'm looking at.
Second quarter results from a topline standpoint.
<unk> normal seasonality in the 270, <unk> III current OCC prices.
To the back half of the year I would get towards the high end of your revenue range. So I just want to make sure I'm not missing.
Any headwinds or any differences versus the normal seasonality that could drive you towards even the midpoint, let alone. The low end of the range are there any moving pieces that we need to keep in mind.
No I think.
Looking at it the right way.
To really give some clarity on our revenue guide relative to where we started.
The commodity businesses, we expect to be down $125 million in revenue over the course of the year with a lot of that already.
In the first half and then about $100 million decline in revenue from the recycling acquisitions relative to expectations. So our expectations for the back half are normal with regard to seasonality impacts.
The only thing that you could see we did start to see hurricane impacts in Q4 of 2022 and those will not repeat.
Okay.
And then can I ask a similar question from margins normally your margins are up half a point.
<unk> versus <unk>.
We're going to have the higher Q3 prices in OCC prices as well that could add maybe half a point to that.
Is that how youre thinking about <unk> versus <unk> or anything else, we need to keep in mind in terms of the margin cadence.
Sure.
In terms of the margin cadence, what we were looking at going from Q2 to Q3 and 23 is a typical margin expansion, but the offset will be the timing difference on the alternative fuel tax credits from a year ago as a reminder.
That wasn't concluded from a regulatory perspective until Q3. So we took all of that benefit in Q3 of last year. So that's the one thing that will dilute the margin upswing that we traditionally see.
Got it thank you.
Thank you and one moment for our next question.
Our next question is going to come from the line of Stephanie more with Jefferies. Your line is open. Please go ahead.
Hi, This is Hans Hoffman on for Stephanie more I was just wondering if you could comment a bit on pricing just in terms of.
Where youre kind of exceeding relative to kind of your internal expectations and then just anything youre seeing from a churn standpoint.
Yes, I think you could.
We would argue that we're probably exceeding almost across the board.
Which is why we're our expectation is slightly higher than our original guidance both on.
On yield and on core price, but to be a bit more specific about it and I think I mentioned it earlier the two places where we're maybe we're seeing we're most pleased would be on the MSW waste stream.
Which I mentioned, it was up sequentially and year over year.
And two a pretty handsome number and then also on residential both of those by the way in years past.
We're a bit of a struggle to see good core price or yield and now we feel good about the fact that not only are they.
The absolutes really good numbers, but the trend has been quite good.
Got it that's helpful. And then could you just maybe comment on the M&A environment just in terms of how valuations look like and any change in activity level there.
Sure I think I think the valuations have crept up a bit.
As you look at a couple of things one is a lot of these smaller businesses are.
Are seeing an uptick in their businesses coming out of Covid.
There's also an expectation from some of these businesses.
That now is the time to sell whether its because they don't have.
Succession plans behind them or.
Cause of some of the labor pressures that they are anticipating.
There's been a.
Certainly an uptick in M&A activity and I think for us it's.
It's a double edged sword, we want to make sure we do have a nice pipeline of M&A opportunities but.
But we don't want to fall into the trap of.
Obtain way up for these and so we will be patient when it comes to those will I would rather as if these are the opportunities are going to go away. So all.
Ill sit back and wait as opposed to paying.
415 times I'll wait for that to come down to a more reasonable number unless somebody is willing to sell it to me today at a more reasonable number.
Thank you we'll move to our next question one moment please.
Our next question comes from the line of Tobey Sommer with Suntrust. Your line is open. Please go ahead.
Thanks, I was hoping you could discuss.
Your labor turnover and compensation growth in the second half versus the first half and then maybe from a longer term perspective.
How does.
That's sort of comp and expense growth interplay with your 5% to 7% EBITDA growth target over the next several years do you do your model it being a little.
Diminishing over that period.
So there'll be I think a couple of things I'll note for you one I referenced that labor rates trended at about so just over 6% for the quarter and if you go back a year ago that was probably 9% to 10% depending on what part of the country, you're looking at sort of moderated.
We had expected it maybe to moderate a tad more but I think what you heard from all three of US is that we have good momentum on the Opex side and in particular on labor, what's driving that is just a couple of things. We've all comment on which our driver turnover is down 250 basis points and why is that significant it takes a lot of the cost friction out from our labor line and we're seeing it not only our Kuala.
Our service and our safety results, but on our labor cost per unit were continuing to see that trend down and then when you think about kind of where we are first half to second half and with Davita added some color on about what kind of the the exit margins look like and what the exit Opex what margins look like.
Youre seeing that momentum build in the second half of the year and helping us build into momentum for 2024, I'll speak to the 5% to 7% for a moment because I think what's interesting is when you look at 2023, specifically, we're guiding about $325 million of EBITDA growth at the midpoint that includes a 125.
$5 million decline from the sustainability businesses and so when you adjust that that's $450 million of growth from the combination of strong execution, and our solid waste business and the optimization of SG&A costs.
Over 8% EBITDA growth in our business and so I think it indicates that that 5% to 7% outlook does have some upside potential when we start to see the momentum of the optimization efforts that we are putting forth and when we see the stabilization in labor, which Dan just spoke about it.
Really helpful.
Drive that forward even more.
I appreciate the discussion.
What kind of right in.
Underlying comp growth is there.
Taking kicking the turnover the hiring training kind of out of the equation.
I'm not sure it could take one more crack at that.
Yes.
What is what is your compensation growth.
For sort of maybe you could take a look at your existing employees like what's what's the underlying trend there as opposed to.
Your training and hiring costs, yes, yes.
Good question, but that six 1% that I commented was looking at average unit rate per hour. So that that is probably the best barometer for whats happening and Thats, what I was mentioning last year that was 9% and 11% depending on what part of the World you were looking at so on an hourly rate, that's where we see the moderation coming down the growth of that rate has come down almost in half.
This is part of the part of this was the emphasis behind looking to take positions out through technology did not take them out, but not choose to replace them.
Because there is a concern and there hasnt been for three or four years now that this labor pool is shrinking.
Particularly on the trade type positions.
And John talks a lot about that but.
But thats why just in 'twenty two 'twenty three there's 500 positions. So far that we've chosen not to replace most of those is divina set around the customer experience side.
Through adding technology, our call volume is down significantly and customer experience.
But there still are a number of those left we said kind of five to 7000 position. So at the low end of that 5000.
Over a period of a couple of years John has some operating positions to take out as he moves from traditional railroad equipment. For example to automated side loader is obviously, a real owner has a person on the back and not only is there an added labor component there, but there is a safety issue to it as much.
More dangerous to be on the back of a truck than to be sitting in the cab operating.
Joyce stake there are.
We've taken out only a 100 of those so far.
Having to do more than anything with truck deliveries.
But there is another 400 that are geared up and ready to go as soon as those trucks trucks come in and I think over the next couple of years, you could see something.
North of a 1000 that we take out not only do you get a person off the back but you also get a 25% to 30% pickup in productivity and the one thing I would add Jim is we skipped over recycling I mean, if you look at the benefits were shown in the recycling business and these automated plants and the margin expansion in the labor dependency ratio reductions, that's where that's a clear place where it's showing up.
It takes a little longer to do it over 15000, plus routes, but in the recycling business, Brent and <unk> done a nice job of really demonstrating where automation drives real dollars out of the business, but all of these reduce that risk that youre talking about which is this kind of inflationary risk on labor.
Excellent I appreciate you're tying in the recycling comments just one brief follow up I know relate with respect to the acquisition pipeline and what Youre seeing.
You kind of give an anecdote of a really high kind of mid teens. Multiple is there is it really that kind of disconnect or was that.
Just a single example, but maybe not representative of the pipeline as a whole.
No.
Look I think what I guess my point was youre starting to see some of these some of these valuations creep up and and so really my primary point was we're going to be disciplined about that particularly as you think about these investments, we're making in R&D and recycling I mean, if you put a multiple on that.
It's a multiple of three or four compared to a multiple of anything in double digits seems to not makes sense compared to those so it doesn't mean, we're not going to do acquisitions, but I think we're going to be disciplined about how we go about that particularly when it comes to some of these higher multiples.
Thank you very clear.
Thank you and one moment for our next question.
Our next question comes from the line of Stephanie Yee with Jpmorgan. Your line is open. Please go ahead.
Hi, Good morning, I wanted to ask about the plastic commodity prices being down it sounds like on VLCC Piper Brian that wasn't so much of a surprise.
Can just comment on what's driven the decline the plastic piece and what your expectations are not necessarily for this year, but yes, maybe perhaps for 2024.
Sure. If you look at what's happening with plastics, it really comes down to the Virgin price for plastics is.
LOE, which is putting pressure on the recycled pricing, but we think long term. If you think about what's happening with brands. They all have commitments to buy.
<unk> content, and we think that will come back they are going to come back into the market to buy to meet their commitments. So we would expect that we would see a ramp longer term one of the reasons why we're excited about some of our investments that we've made in plastics recycling and advancing those.
And it's one of the things that are automated recycling plants do they help capture more plastic which will go to those markets longer term.
Okay great.
Just a question again on kind of the longer term EBITDA margin expansion potential at the 40 to 60 basis points to 18 nine Shandong.
5% to 10%.
EBITDA growth.
Is that premise on yields being higher than that 2% level that was presented back in may of 2019, just because.
Average yield is tracking higher than that right now and it seems like there is momentum behind pricing generally built on the rugby and built on the collection and also the post collection side.
Yes, it's a great question, Stephanie I think the way that we're looking at that is not a specific yield number but instead the spread between our yield and our cost inflation and what we're really satisfied with is that we've seen flexibility in our pricing programs to be responsive to different cost environment and so.
Whether the yield in that initial guidance in 2019, with 2% or closer to the five 5% today. What we're focused on is ensuring that we get the right spread from optimizing that business as well as continuing to price to cover cost inflation.
For long term growth.
Okay that makes a lot sense. Thank you.
Thank you.
Thank you and one moment.
Our next question comes from the line of Jim Schumm with TD Cowen. Your line is open. Please go ahead.
Hey, good morning, and thanks for squeezing me in.
So good morning. So you cited inflation in the sustainability growth program is it fair to assume that the total capex to achieve the 26 targets will be higher than what you laid out in April and can you give any indication of what that magnitude might be.
We are expecting that there will be an increase in the over all program, but because of the size of the program and the multi year nature of executing upon it.
We are going to wait to give specific updates with regard to the magnitude of that it's difficult for us to update this a quarter at a time.
What we look to do is ensure that we give you clarity as we have significant or.
Any meaningful revisions and near term outlook and the most material one that we have at this point is just the shift of the $200 million from 23 to 24 everything else is quite inconsequential. So that overall outlook at this point.
Okay, great. Thank you and then just lastly for me you mentioned a couple of the permitting issues.
And maybe some interconnects.
Are you seeing any supply chain issues for equipment or any third party constraints with pipeline companies or anything like that.
On the equipment side, we did a good job in particular on the R&D side of making sure that we.
Really procured our longer lead time items and those critical components related to our build so we feel good about that one of the things that we've been launching on both sides is really electrical components and so the team has done a good job of getting out in front of that those tend to be a year out.
Lead time like items, and then working in close coordination with <unk>.
Pipeline, and then electrical interconnect and those are typically very local in nature and very site specific.
So we've seen some issues here and there that we're trying to navigate through and.
Again this is pretty normal course, when you think about what we're trying to build and scale.
The size of our portfolio.
Yes, Okay that makes sense. Thanks a lot.
Okay.
Thank you and one moment.
Our next question comes from the line of Kevin Chiang with CIBC. Your line is open. Please go ahead.
Thanks for taking my questions here, maybe just two quick ones from me given.
I appreciate all the detail on this call already just to confirm the you expect to see expectations that you laid out at the sustainability of Investor day, the $250 million to $350 million.
That's still the right range, we should be thinking about just to confirm that.
<unk>.
Yes, we will provide greater detail in the future once we have a bit more clarity from the IRS, but we feel confident in the fringes.
Okay. That's helpful.
And then you mentioned I think churn in the prepared remarks.
And so are the conversion rates in your prepared remarks youll from core priced.
Between core price and yield.
85%, that's obviously tracked nicely over the past couple of years, if not longer.
I'm wondering how you think about that that conversion rate as you cross this inflation, we've seen in it sounds like youre, starting to see a little bit of.
Inflation or deflation in some of these buckets are these things arent rising as fast.
Do you think that mix.
Mauler players a little bit more competitive if they're not seeing the same inflation they've become a little bit more competitive on pricing.
And that conversion rate could could slip a little bit or do you think <unk> structurally changed how you think about <unk>.
Core price and yield to kind of hold on to that even in an inflation environment.
Let's say three 4% versus six 7%.
Jim said at our last quarter to quarter before trying to expand margin. When inflation is eight 9% is not ideal so as we see inflation ticked down and CPI is probably a good a good example of that.
We don't we see our ability to grow margin, obviously get a little bit stronger as inflation comes down.
Secondly, CPI, obviously is tailing off I look at that two ways, one of which is the cost side, which I commented on the second piece of it is as you look back on a lot of our index price contracts, we've still got a bit of a tailwind and we talked about that when we gave guidance of about five 5% conversion rate. There. So and lastly, I think whether it's been an inflationary environment high CPE.
Lower CPI, if you look at our historic pricing strategy, we've priced to get to get margin on top of operating expenses, regardless of what's happened on the CPI side.
That's excellent. Thank you for the color I'll leave it there. Thank you very much.
Thank you and I would like to turn the conference back over to Jim Fish, President and CEO for his closing remarks.
Okay. Thank you so much.
I really appreciate your detailed questions. This morning, it helped us.
To explain why we're feeling good about it.
This quarter coming out so so thank you for those thank you all for joining us looking forward to talking to you again next quarter.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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