Q3 2024 Waste Management Inc Earnings Call
Good day, and thank you for standing by.
Welcome to <unk> third quarter 'twenty 'twenty four earnings conference call at this time, all participants on 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 to press star one on your telephone you will then hear an automated message advising yohan. This race to withdraw your question.
Please press star one again please.
Speaker Change: Please note that today's conference is being recorded I will now hand, the conference over G O Speaker House at Eagle Vice President of Investor Relations. Please go ahead.
Speaker Change: Thank you Olivia good morning, everyone and thank you for joining us for our third quarter 2024 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 Fish: If you look at our high level financials and provide a strategic update John will cover an operating overview and to be able to cover the details of the financials.
Jim Fish: Before we get started please note that we filed a form 8-K that includes the earnings press release and is available on our website at Www Wm com.
Jim Fish: The 8-K, the press release and the schedules to the press release include important information.
Jim Fish: During the call you will hear forward looking statements, which are based on current expectations projections or opinions about future periods will also be providing an update updated outlook for 2024. This outlook does not include transaction and advisory cost incurred in connection with the acquisition of Stericycle, nor post closing financial contributions related to the planned acquisition of Stericycle.
Jim Fish: All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.
Jim Fish: These risks and uncertainties are discussed in today's press release and in our filings with the SEC clean our most recent Form 10-K and Form 10-Qs.
Speaker Change: John will discuss our results in the areas of yield and volume, which unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume.
Speaker Change: During the call, Jim John and Divina will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Speaker Change: Any comparison, unless otherwise stated will be with the prior year.
Speaker Change: Net income EPS income from operations and margin operating EBITDA and margin.
Speaker Change: They expected 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.
Speaker Change: These adjusted measures. In addition to free cash flow are non-GAAP measures.
Speaker Change: 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.
Speaker Change: This call is being recorded and will be available 24 hours a day beginning approximately one PM eastern time today.
Speaker Change: A replay of the call.
Todd: <unk> web site at Www dot investors that Wm Dot com Todd.
Todd: Sensitive information provided during today's call, which is occurring on October 29, 2024 may no longer be accurate at the time of a replay.
Todd: Any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Wm is perfect.
Now I'll turn the call over to <unk>, President and CEO Jim fish.
Jim Fish: Okay. Thanks, Ed and thank you all for joining us.
Jim Fish: Our quarter quarterly results once again reflect robust operational performance in our collection and disposal business as well as our success executing on our strategic priorities.
Jim Fish: We're pleased to report another quarter of double digit operating EBITDA growth positioning us well to deliver about $6 5 billion.
Jim Fish: For the full year near the upper end or upper end of our guidance.
Jim Fish: Our cost optimization efforts and disciplined pricing programs together are increasing spread between price growth and our cost to serve and our sustainability investments are providing margin accretive growth.
Jim Fish: As we'd anticipated the third quarter set a new record for operating EBITA margin at 35%.
Jim Fish: Year over year expansion of 90 basis points.
This consistent growth underscores our commitment to delivering exceptional value to our shareholders.
Jim Fish: We remain focused on furthering our cost optimization efforts and collection and disposal.
Jim Fish: In our collection and disposal business and improving frontline retention and John will share more about the headway, we're making here.
Jim Fish: Our teams are also hard at work integrating acquisitions in key markets and have closed nearly $800 million of solid waste acquisitions through the first nine months of the year with a strong pipeline of additional deals.
Jim Fish: We continue to progress towards closing the acquisition of Stericycle, which will add a complementary medical waste platform to our business and expand our suite of service offerings during the quarter Stericycle shareholders approved the merger agreement we received clearance from all international regulators, except for Canada, which is progressing.
Jim Fish: We're also advancing our integration planning, which has confirmed our confidence in the value of the Stericycle acquisition, we look forward to welcoming stericycle team members to the Wm team this quarter.
Jim Fish: Turning to recycling during the quarter.
Jim Fish: We completed eight projects across our network, including six automation upgrades and new facilities in New York and Florida.
Jim Fish: Our team's focus on execution has been excellent with two of the projects completed in the quarter beginning operations ahead of plan.
Jim Fish: We've now completed 24 of the 39 projects and the growth program, which have added one 5 million tons of annual recycling capacity across North America.
Our automated recycling facilities are consistently delivering lower labor cost per ton and higher blended value on our commodity sales compared to our legacy plants, which translates into better operating EBITDA margins.
Jim Fish: And the renewable energy business, we remain on track to commission or for new renewable natural gas projects in the fourth quarter, adding to our DFW plants, which we brought online earlier this year.
Jim Fish: With these five projects along with the two we completed prior to 2024, we will have seven of the 20 planned projects online by year end.
Jim Fish: There are an additional 12 projects in active construction and the final plant will be will begin construction in early 2025.
Jim Fish: Seven projects are expected to contribute approximately $6 million of MB to use.
Jim Fish: Annual production in 2025 next year as anticipate is anticipated to be a pivotal year.
Jim Fish: Contributions from our renewable natural gas investments and.
Jim Fish: And we're committed to scaling this unique opportunity to create long term value for the environment and shareholders alike.
Jim Fish: We came into this year expecting strong execution across several fronts and through the first nine months, we've delivered results that exceeded our own high expectations.
Jim Fish: As we look to look ahead to 2025, we anticipate continued growth in our solid waste business increased contributions from our sustainable sustainability growth investments and the successful integration of the Stericycle business.
Jim Fish: To come together to create a significant step change in revenue earnings and free cash flow.
Jim Fish: I want to thank our dedicated team, whose hard work and commitment make all of this possible.
Jim Fish: And now I'll turn the call over to John who will provide a deeper dive into our operational results for the quarter. Thanks, Jim and good morning.
John Morris: Before we dive into our operational performance and financial metrics I want to take a minute to acknowledge and thank our team for providing safe and reliable service to our customers, especially considering the severe weather events Hurricanes Selina Milton affected both our employees and the communities we serve.
John Morris: We're hard working.
John Morris: We're working hard to support those impacted helping restore sense of normalcy in these areas.
John Morris: Turning to our results, we continue to prioritize technology and automation to optimize our cost structure and enhance operational efficiency. This is evident in operating expenses of 66% of revenue in the third quarter, which improved 70 basis points and overcame a 30 basis point headwind from additional workdays in the quarter.
John Morris: This is the fourth consecutive quarter. This measure has been below 61%.
John Morris: This quarter's result is driven by continued benefits from cost optimization pricing discipline and easing inflation.
John Morris: We also benefited from lower fuel prices and stronger contributions from our renewable energy business, though these gains were offset by the impact of increased recycled commodity prices on the brokerage business.
John Morris: Our operating expense performance was largely driven by our collection business in particular in labor and repair and maintenance costs.
John Morris: Labor cost improved through a combination of retention technology and automation.
John Morris: Automated more than 800 routes in our residential fleet since 2022, reducing our labor defendants boosting efficiency and improving safety performance. The continued adoption of scheduling and planning tools advanced mapping systems and dynamic routing is also driving efficiency and reducing operating costs.
John Morris: In the third quarter, our weighted average collection efficiency rose by 2% with the residential line of business increasing more than 4%.
John Morris: Our intentional focus on making <unk> a great place to build a career is leading to reduced driver and technician turnover improving about 19% annualized a significant improvement over last year.
John Morris: Repair and maintenance costs also improved as a percentage of revenue driven by our ongoing implementation of technology technology, driven processes and improvements in our truck delivery schedule.
John Morris: Our focus on execution in these areas are leading to strong financial performance as adjusted adjusted operating EBITDA in our collection and disposal business grew $181 million in the quarter with margin expanding to 37, 4%.
John Morris: Finally, turning to our revenue growth our pricing results continue to track well our team continues to leverage customer specific data and insights to deliver pricing in line with inflation alongside our margin expansion objectives, we're being purposeful in allocating our people and our assets to their best use. This approach is very evident in our residential line of business, where we've intentionally.
John Morris: <unk> moved away from lower margin business, while at the same time significantly improving our safety performance growing organic revenue and expanding operating EBITA margin.
John Morris: By maintaining and growing the right volumes were driving long term value and enhancing overall returns.
Our volume results have trended consistently to what we saw in the first half of the year with growth from commercial collection, MSW and special waste it.
John Morris: It is encouraging to see our key volumes continue to grow, particularly MSW, which was up five 7% in the quarter.
John Morris: While the rollout business remains soft the declines in volume showed sequential improvement similar to the residential business, we're making the right volume tradeoffs as organic revenue grew in the quarter and operating EBITA margin expanded.
John Morris: Churn was nine 2% in the quarter, which is similar to last year and validates the effectiveness of our customer lifetime value model.
John Morris: Service increases continue to outpace decreases further reinforcing our execute execution.
John Morris: We remain confident that our data driven business decisions at technology investments are leading to greater operational efficiency and improve return on capital, which is reflected in the growth and margin performance of our collection and disposal operations and.
Speaker Change: In closing I want to thank the entire Wm team again for their contributions their performance positions us for a strong year end finish and sustained growth heading into 2025, and now I will turn the call over to Divina to discuss our third quarter financial results in further detail.
Divina: Thanks, John and good morning.
Divina: Results underscore the effectiveness of our strategy to maximize customer lifetime value and drive operating efficiency.
Speaker Change: Our success is again evident in the operating EBITDA growth, which was 11% in the quarter.
Speaker Change: And operating EBITDA margin, which reached an all time high of 35%.
Speaker Change: This result was at the low end of our projection of 35% to 31% for the quarter due to higher than expected recycling commodity prices.
Speaker Change: When considering about 20 basis points of margin pressure from higher recycled commodity prices, we see the 90 basis points of margin expansion is a strong result that was right at the middle of our guidance range.
Speaker Change: This highlights that margin expansion from organic growth and cost optimization met our expectation.
Speaker Change: Once again margin expansion was driven by the collection and disposal business.
Speaker Change: Disciplined pricing strategy intentional shedding of low margin residential volume.
Speaker Change: Improved employee retention benefits from truck deliveries and the use of technology to drive efficiency combined to deliver 140 basis points of margin growth in the third quarter.
Speaker Change: The 50 basis point offset relates to higher incentive compensation costs.
Speaker Change: These results have been driven by robust operating they have driven robust operating and free cash flow growth as well.
Speaker Change: We generated $3 $88 billion of cash from operations through the first nine months of 2024, an increase of more than 16% compared to the same period in 2023.
Speaker Change: With capital expenditures tracking according to plan across the business and proceeds from the divestiture of non strategic assets a little ahead of our plan, we've grown free cash flow by 20%.
Speaker Change: Our outlook for the full year is strong with operating EBITDA towards the high end of expectations being the driver.
Total capital expenditures are expected to be 315 to $3 5 billion for the year.
Speaker Change: The increase of about $50 million from our prior guidance relates to continued progress on the development of our sustainability growth investment.
Speaker Change: Additionally.
Speaker Change: We continue to expect $145 million of investment tax credits in 2024 from our renewable natural gas project.
Putting all of this together we're on pace to achieve the high end of our full year free cash flow guidance for the year of two <unk> one $5 billion.
Speaker Change: Our balance sheet remains strong and we're well positioned to fund the acquisition of Stericycle.
Speaker Change: As a reminder, we have suspended our share buyback program because of the current focus on M&A growth, including the pending Stericycle acquisition, and then nearly $800 million of core solid waste acquisitions completed through the end of the third quarter.
Speaker Change: We remain committed to a disciplined approach to allocating capital and we prioritize a strong investment grade credit rating target.
Speaker Change: Organic and inorganic long term strategic growth and strong shareholder returns through dividends and prudent share repurchases.
Speaker Change: With three quarters of the year complete we're confident that we will meet or exceed the high end of our 2024 guidance for revenue and free cash flow.
Speaker Change: We will deliver about $6 5 billion of operating EBITDA, representing a growth rate of about 10%.
Speaker Change: Strong finish to 2024, it will create momentum that we expect to carry into our 2025 plan.
Speaker Change: When you combine our solid waste growth with an increase in earnings contributions from sustainability projects and the expected benefits from adding the stericycle business to our portfolio. We expect the year ahead to be one of standout performance.
Speaker Change: Thanks to the efforts of the 48000 plus team members across Wm, who are working hard to deliver on all of our strategic priorities.
Speaker Change: Bullish about the future at Wm.
We want to thank the team for all they do.
Speaker Change: Look forward to delivering on our targets for 2024, as we close out the remainder of the year.
Speaker Change: With that Libya, let's open the line for questions.
Speaker Change: Certainly ladies and gentlemen to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw your question simply press Star One again, please standby, while we compile the Q&A roster.
Speaker Change: Now first question coming from the line of Tyler Brown with Raymond James Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: Thanks, Tom.
Hey, good morning, So I think back in 2003, you guys did call it $40 million of renewable segment EBITDA.
Speaker Change: But do you guys still feel comfortable that you'll be run rating at somewhere around $300 million in sustainability EBITDA here in Q4, and can you guys give us any color just big picture on how much incremental EBITDA comes from that segment. In 2005, I think you guys had mentioned that you would be run rating at maybe half a billion dollars by the end of 'twenty five.
Speaker Change: Does that all still seem good or has that been pushed a little bit to the right.
Speaker Change: So I can take this one this is Tara hemmer.
Speaker Change: Youll recall during our last call $800 million is what we plan to deliver in 2027, and we had pushed that out if you look at the earnings contribution for 2024 from the sustainability related businesses.
Speaker Change: Best thing not to be in the 120 to $1 30 range for 2024, and Youll recall, we had originally guided $1 15, plus another $15 million coming from commodity prices in the recycling business.
Related to what we expect to deliver in 2025, what we can tell you really qualitatively is a little bit of the pieces. We certainly expect higher EBITDA growth as these plants come online not just on the R&D space, but also the recycling space.
Speaker Change: And we're going to expect lower Capex in 2025, so when you put those pieces together you will expect greater flow through.
Speaker Change: The other thing we should mention is we are expecting slightly higher capex for the program. Originally we had said between 2.2 dollars 9 billion and we're now expecting about $3 billion.
Speaker Change: So all in all we do expect 2025 to be a significant year for our sustainability related investments a bit premature for us to give you all the pieces for 2025 based on where things may shake out related to the completion of the plants in Q4 of 2024, and then also of course <unk>.
Speaker Change: <unk> closely commodity prices.
Speaker Change: Give more of an update.
Speaker Change: Early 2025 and Tyler.
Speaker Change: Yes.
Speaker Change: The one thing I would just clarify is there are some additional details that we provided in the press release that will give color too.
Speaker Change: Some of the mechanics associated with the collection and disposal business and their contribution to the earnings growth. This sustainability investment portfolio that <unk> talked about and I think it's important to look at those details to see the total picture and if you look at those details what Youll see is year to date, we've delivered $92 million in EBITDA.
Speaker Change: And then Tara just on the Capex. So I think if I take the 950 <unk> already spent call. It one four so you're already I think by the end of 'twenty four at call. It two three so that implies maybe another 700 is that.
Speaker Change: In 2000 525 million a big step down in 'twenty, six or is that going to be maybe right in between the two absolutely you have that right you have the pieces right.
Speaker Change: Okay, Okay, perfect and just my last one Jim So I know you guys don't give a ton of color on the out year, but you did mention that again, you kind of set up for an outsized growth in 'twenty five.
We're in the business of splitting hairs. So I just wanted to kind of understand exactly what you mean by that so I think of you guys as a 5% to 7% organic EBITDA grower and then we add some peak for M&A in renewables. So when you say an outsized grower is that any context to that 5% to 7% organically or are you just simply.
Speaker Change: Seen that that growth can be more than five to seven with stericycle and renewables just any additional color would be super helpful.
Speaker Change: Yes, so the five to seven is the number that we gave in 2019 with with Investor day, and we've actually been over the last couple of years been outperforming that organically.
Speaker Change: But if you the reason where we're as excited as we are about 25% 26 27 is is that when you look at a couple of things first of all you look at so you just talked through with Terra the sustainability investments.
Speaker Change: As she said Capex you had the numbers just about exactly right, we'd probably have about $700 million left in capex, maybe a little bit more than that.
Speaker Change: And most of that happens next year.
Speaker Change: So.
Speaker Change: So you can expect to see.
Speaker Change: A pretty substantial uptick in free cash and the free cash flow component and when I say most of that occurs next year that is still lower in terms of capex. This year, because this year is going to be.
Speaker Change: Call. It 900 for those sustainability investments next year will be something lower than that and then 2026 will be significantly lower than that in terms of capex and at the same time you see the EBITDA really really kicking up we do have most of these plants. It seems rolling on in the fourth quarter. So we're not getting the impact of of EBITDA in that year.
Speaker Change: This year is no exception to that with four of the five coming online in the fourth quarter kind of the same thing for next year, a number of plants are coming online in the fourth quarter, but we do fully expect to see $800 million by the time. The first full year that will be 2027.
You add to that Stericycle, we've had four five months to look at it we're even more enthusiastic about the strategic side of Stericycle than we were when we announced this four five months ago Rafa and his team have had a lot of opportunity to look into this in addition to looking at their core business, which we said four months ago was really just kind of a fourth line of business for us.
Speaker Change: We now.
Speaker Change: And I believe that even more after after spending.
Speaker Change: Five months on the synergies piece, which we said.
Speaker Change: Initially we thought it might be $125 million over three years, we now are pretty convinced that that's a conservative number.
Speaker Change: Exactly what that number is going to be yet and we'll give you more insight into that with guidance 25, but look I mean, the best example is SG&A, we baked in about $40 million worth of SG&A synergies there in the original 125 and that takes their SG&A number from 22% of Rev.
You're down to 19, we're reporting eight 9% ourselves today. So you can understand our optimism.
Round synergies and then John talked a lot about the use of technology, it's something that we probably five years ago started recognizing that there was particularly with these trade type positions there was.
Speaker Change: Kind of an impending shortage coming and.
Speaker Change: And so we started.
Speaker Change: Investing in technology to.
Speaker Change: To win those positions.
Speaker Change: Trent away from us that we wouldn't have to replace them that we would use technology in and hence the investments that we've made over the last five years and technology and those are really all started to show up you've heard John talk a lot about I think you said four consecutive quarters of sub 61, opex as a percent of revenue that is largely driven by by our pricing programs.
Speaker Change: But also by our cost.
Speaker Change: Improvement on the efficiency side, you combine all of those plus and it's still a pretty robust.
Market out there for tuck in acquisitions and you can see why we're really really optimistic no matter what happens with the election no matter what happens with the economy borrowing.
Disastrous geopolitical events were very optimistic about 'twenty five 'twenty six 'twenty seven.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Toni Kaplan: Thank you so much.
Toni Kaplan: Hi, Good morning wanted to ask about the.
Toni Kaplan: Revenue guidance raise I know you don't give guidance quarterly, but <unk> was a little bit stronger than I guess, what I was expecting and so.
Toni Kaplan: It was the raise driven by <unk> performance and why not is there anything that leads you to expect the momentum you had in the quarter won't continue into <unk>. It doesn't sound like it so I just wanted to understand.
Toni Kaplan: What was going into the thought process there. Thanks.
So and.
Speaker Change: Youre right that the third quarter was an outsize performance on the revenue line and that really came from two things. It was recycled commodity prices and landfill volumes were optimistic that the landfill volume contribution continues into the fourth quarter, there wasn't anything specific or unusual about that growth at some strong market performance.
Speaker Change: In kind of the.
Speaker Change: The Midwest part of our company and really good.
Speaker Change: Contribution margins on that business the recycling commodity price piece of it is recycling brokerage contribution and with the port strike impacts that we saw late in the third quarter and some continuing continuing uncertainty associated with those impacts going into the fourth quarter, we're less optimistic that youll.
Speaker Change: Outside service cycling commodity prices continue into the quarter ahead or into 2025 at this point, it's too early for us to say so.
Speaker Change: Really happy with the core business performance and our contributors from collection and disposal, specifically, a little more cautious with regard to the recycling commodity price piece, though that is the lower flow through part of the business, which is why we are still confident in the EBITDA contribution of that revenue growth.
I think we had a little bit of an offset from lower electricity pricing that hit the topline for the quarter. So so that would tell you that.
Speaker Change: It's part of why we were as pleased with the performance at seven 9% growth there on the top line I think what it tells US as we look out to 2025 is that there arent any storm clouds on the horizon, there with respect to the economy and its so hard to tell these days obviously in an election year, it's really hard to tell.
Speaker Change: Because both sides are kind of giving their own talking points, but we're not seeing anything that would indicate.
Storm clouds on the horizon for US we feel like the economy is on relatively good footing.
Speaker Change: Yes that sounds great.
Speaker Change: I wanted to ask also on an update on the price cost spread and how youre thinking about how that progresses and the next few quarters. Thanks.
Tony I think certainly we're pleased as I said in my prepared remarks, we remain on track with regard to our pricing objectives for the year a few things I would point out is when you look at the spreads here you see that CPI is down again about 120 basis points for the quarter and 160 basis points year to date, and if you compare that to our core.
Speaker Change: Core price and yield numbers I think it tells a good story and then to the comments you heard from Jim and Devine and it's showing up certainly in the margin. So long story short we feel good about the kind of disciplined approach, we're taking to pricing.
Speaker Change: The customer value lifetime model were using from a data and analytics standpoint.
Speaker Change: And when you look at as I mentioned, when you look at the spread it continues to show up in Opex and in margin.
Speaker Change: And I think too John.
John Morris: We've talked a lot about $5 to 7000 jobs kind of a trading away from US I mentioned that just briefly.
Speaker Change: In response to Tyler's question.
Speaker Change: Worried about 'twenty 200, a little bit more in that $22 41 to be precise since 2022 positions that we have chosen to not refill that debt.
Speaker Change: Left us via attrition and we've chosen not to refill those and we think John another potentially 3000 so.
Speaker Change: Call it fourth or fifth inning to use the baseball analogy is about where we are now most of those are coming out through recycling automation and then through this conversion from traditional rear load to automated sideload Tony the one final point I might make is while inflation is generally coming down we're not seeing that with our frontline.
Speaker Change: Wages and that's part of the reason why you hear so much conviction about the continued investments in automation and technology, whether it's the core business whether its recycling facilities were still seeing you know four five to five 5% on general wage inflation with those.
Speaker Change: Frontline roles in fact, we heard from one of our Avp's during our quarterly reviews that we're hiring technicians and that number starts with a four now and it's going to start with a five in terms of the rate per hour. So when you look at the investments, we're making to try to be a little less labor dependent through attrition as Jim mentioned, it kind of gives us that much more conviction about those investments.
Speaker Change: Perfect. Thanks for the color and congrats on the quarter.
Speaker Change: Yes.
Speaker Change: Thank you and our next question coming from the line of Jerry Revich with Goldman Sachs. Your line is open.
Jerry Revich: Yes, hi, good morning, everyone.
Speaker Change: Those of US New Yorkers on the line, we will ask Nomura baseball analogies. Please.
Speaker Change: Atlanta to come online this fall.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: So congratulations.
Speaker Change: Strong results.
Speaker Change: Just wanted to talk about the.
Speaker Change: Returns that we're seeing on the recycling investments is it possible just to get a sense for the savings per plant.
Speaker Change: Budgeting in the program what are we seeing as the plants are coming online.
Speaker Change: When you folks make these automation moves.
Speaker Change: The results are priced at the upside I'm wondering is that starting to play out.
Speaker Change: How should we be thinking about the per plant economics versus what you folks underwrote at the beginning of the program.
Speaker Change: Well, what we can tell you is we're tracking a couple of key metrics. The first and we've said this consistently be labor cost per ton is really in the 30% improvement range and that is consistent across all of our plan.
Speaker Change: The other thing that we're seeing is roughly 17% higher blended value on the commodities, we sell we're creating a cleaner product and this is really important if you think about the commodity prices that we're at today and we're expecting to end the year around $90 a ton or investment thesis was $1 <unk>.
Speaker Change: Five so getting a higher blended value on our commodities is very important and that's been proven out.
Speaker Change: The other thing that we track is our growth operating expenses and those are also 17% improvement across the portfolio of automation plans.
Speaker Change: And then the other point that we don't talk about as much is volume and we are seeing a volume growth story coming out of these investments, which was a pivotal piece of what we were going to be.
Speaker Change: Really offering to the communities that we have these investments in Q3 was one of the first quarters, where we've seen that volume growth because we have had some impacts related to shutdowns. So we'll see that transfer across each year. So when you stack those together, we're seeing strong margin.
Speaker Change: <unk> on our recycling plans across the portfolio and that volume Terra is really a function of.
Speaker Change: The plant processing pasture, correct things that exactly so plant processing faster. We're also expanding the size of some of these plants that we're building.
Speaker Change: It's been a great story, when we look at.
Speaker Change: One of the market as John is going to be visiting later today in Minneapolis, where we've seen really really strong volume growth in that market and then also EBITDA performance I think it's really important to have pull all of that together Terra outlined all of the contributing factors. When we look at the thing that made us so.
Speaker Change: Confident in this investment strategy it really was the payback period.
Speaker Change: The recycling investments relative to investments, we make in our traditional collection and disposal assets and we've always talked about the recycling investments being one of the best return on invested capital that we have across our portfolio and we are seeing that not just holds that accelerate so we're really happy to see.
Speaker Change: The payback periods in that 6% to seven year range.
Speaker Change: And we've got confidence.
Speaker Change: <unk> that with some of the outsized performance, particularly on throughput and volume as Tara outlines is actually going to be better than what we had planned when we built.
Speaker Change: The strategy, despite the lower commodity price values.
Speaker Change: Okay Super and then in terms of the landfill gas facilities that are coming online.
Speaker Change: Roughly speaking it spot market economics, where you think that would imply roughly $150 million to $200 million in incremental EBITDA.
Speaker Change: <unk> versus 'twenty four from these plants.
Speaker Change: Anything we should keep in mind in terms of your contracting strategy or any other moving pieces as we think about that.
Speaker Change: <unk> 25 versus <unk> 24 bridge on that on.
Speaker Change: On that part of the investment.
Speaker Change: Sure I'm glad you brought that up because I think there is a tendency to look at the spot market prices for Rins and just as a reminder, we are taking a portfolio view of our R&D that we're producing and one of the things that we outlined was to really work on contracting more of our volume.
Speaker Change: So today, we are on about 40% for 2025, and we expect to expand that over the balance of Q4 and going into early <unk>.
Speaker Change: Early 2025, and that is a mix of long term offtake in the voluntary market with utilities and also our ability to forward 2025 brands and we've been able to do that successfully so that gives us confidence.
Speaker Change: And really any political environment, whether whether or not Trump or Harris gets elected we're seeing strong forward selling on 2025.
Speaker Change: It's probably also worth mentioning that.
Speaker Change: For.
Speaker Change: For everyone's.
Kind of clarification on the plants themselves, we tend to think that once the capex stops and once the construction is complete and all of a sudden these are starting to produce revenue and EBITDA and there are multiple steps afterwards that are largely outside of our control the commissioning of the plant.
Speaker Change: In many cases, the testing of the gas coming out of the plant and then the final step which is EPA approval of that plant.
Speaker Change: And while we'd like to think that all of those move efficiently.
Speaker Change: It is it is government so.
Speaker Change: In many cases, so it doesn't always move as efficiently as we would our as quickly as we would like.
Speaker Change: Which I think is a credit to your team that we're able to get as many plants as we have 20 plants and still stay relatively close to the timelines that we've that we broadcast but there are multiple steps beyond just the construction phase.
Speaker Change: That's right.
Super.
Speaker Change: Actually just one last one just to pull the thread on the Stericycle comments that you made earlier on the call can you just talk about over the course of diligence what you folks think about the ability to implement lease management type pricing on that business and the ability to cross sell so very interesting.
Speaker Change: To hear about the additional opportunity on the cost side.
Speaker Change: What do you think based on the diligence on the pricing part of the equation.
Speaker Change: So as Jim mentioned earlier, all of our diligence and integration planning processes have really spoken to our bullishness with regard to the long term strategic outlook.
Speaker Change: Of this business.
Speaker Change: With regard to pricing what I would tell you Jerry is the integration planning hasnt been a customer oriented it's been more about bringing the two teams together, bringing our systems and processes together and thinking about how we can use the wm way of using technology to optimize our fleet using technology to optum.
Speaker Change: As the back office in order to reduce the cost of serving in that business, we will know more once.
Speaker Change: Stericycle team as part of Wm.
Speaker Change: The runway and projections on revenue growth, but we still think that that overall investment thesis holds because we think that long term medical waste is one of those parts of the U S economy, where we're going to see outsized growth.
Speaker Change: Yes, Gerrick divina touched on it but I do think when you step back a little bit from it there's elements of that business that fit very nicely over and over top of Wm and if you kind of consider it a fourth line of collection business right in terms of trucks, and maintenance or repair and labor and efficiency and all the things that we've talked to you folks about over the last couple of years, we think there's benefits down the road or where we can overlay.
Speaker Change: Those investments and processes to drive some drive improvement on the operating side.
Speaker Change: I appreciate the discussion thank you.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Next question coming from the line of Noah Kaye with Oppenheimer. Your line is open.
Noah Kaye: Thanks, very much. So so in addition to stericycle pending.
Speaker Change: You spent a lot on <unk>.
Noah Kaye: Solid waste M&A. This year can we talk a little bit about that the types of businesses. You are picking up and then from a housekeeping standpoint, what the rollover contribution is on revenue per 25.
Speaker Change: Certainly, yes, we've had we've had a strong year, we closed almost $800 million of acquisitions I think in the last call we mentioned that.
Speaker Change: We probably could be in the range of $1 billion and we still feel good about the pipeline whether that closes in Q4 rose a little bit into Q1.
Speaker Change: Yet to be determined, but we feel good about the pipeline and the deals that we have teed up I think important to note. We said this on the last call. There is a handful of markets, We mentioned, Arizona, the Carolinas, Florida and now the most recent acquisition of Winters Brothers and long Island. Those are both represent not only a good deals for us but in strategic markets for us.
Speaker Change: Hosted of different reasons, so feel really good about that they are all performing very well to date.
Speaker Change: We're focused on trying to get the next handful of deals closed here in the next few months and then from a rollover perspective, we see about $150 million of rollover benefit to the revenue line, which we think will translate to about $35 million of EBITDA in 2025.
Okay very helpful. There and then you know what.
Speaker Change: I'll just stick with short term modeling housekeeping.
Speaker Change: So sort of 5% total revenue growth implied for Q.
Speaker Change: Your yield trends should probably continue to be pretty healthy.
<unk> got probably close to a point here on the M&A side.
Speaker Change: It sounds like almost do you think the volume could be kind of flattish I know you had a tough.
Speaker Change: Because I think you had some cleanup volumes last year.
Speaker Change: But.
Speaker Change: We also had some storms this year that might provide some opportunity. So just kind of baseline for us how youre thinking about organic trends report Q and whether there might be any upside to the volume side.
Speaker Change: So the volume story for 2024 has been one for us where the.
Speaker Change: Our commercial collection business, and MSW, which really speak to us about the general health of the overall economy has been really strong over the course of the year and consistent with our expectations. The one soft spot for US has been those industrial hauls and they've been lighter than we expected.
Speaker Change: Certainly something that we hear in the marketplace about just a little more reservation on industrial investment in this environment. We think some of that could loosen up in the fourth quarter. After there is clarity in the election, but yet to be determined and certainly not something that we're creating guidance outlook on with respect to.
Speaker Change: The revenue guide for the fourth quarter.
It really isn't a volume story, where we were reserved on.
Speaker Change: Top line relative to Q3, it was commodity price and so I would tell you. The expectation is take those Q3 volumes that we saw and carry them into Q4 and early 2025 is what our outlook.
Speaker Change: <unk>.
Speaker Change: Alright very helpful. Thank you.
Speaker Change: Kim.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the lineup Kevin Chang with CIBC. Your line is now open.
Speaker Change: Hi, Thanks for taking my question.
Speaker Change: That's on a good Q3 print there.
Kevin Chang: I was wondering if you could maybe provide any more color on the Canadian competition Bureau review it looks like it's the last one.
Speaker Change: For your clothes on Stericycle.
Speaker Change: Noted you feel comfortable youll.
We'll get that done in Q4 here, but just any color in terms of what theyre looking at.
Speaker Change: Since they filed this or I think you do overlap on pharmaceutical destruction correct me if I'm wrong.
Speaker Change: Any color there would be would be helpful.
Speaker Change: So I would say its typical competition reviews in the Canada market, specifically nothing that concerns us with regard to the pathway to getting to close and I just have to say thank you to all of our team members who have been working really diligently both the legal team and the Canada opera.
Patients lead our SaaS.
Speaker Change: Order to work through these processes and we're optimistic that we're going to be able to get that Clarence here, yet in the fourth quarter and move quickly to close.
Speaker Change: That's helpful.
Speaker Change: Immediately second one here.
Speaker Change: The progress on on these cost initiatives.
Speaker Change: Look at your Opex.
Speaker Change: Line items, a lot of them if I look at it from an intensity perspective, let's say as a percentage of revenue a lot of them are kind of back to where they were prior to this inflationary environment.
Speaker Change: Maybe the one thing that does stand out to me as maintenance and repairs.
Speaker Change: Tracking kind of.
Speaker Change: Mid to high 9% as a percentage of revenue I think we've seen that below 9% prior to the move in inflation. Just wondering if there is an opportunity to move that.
Speaker Change: Lower or is there something structural there that keeps that a little bit more elevated in this new cost environment, Yes, Kevin I think thats fair and Youre starting to see I think this quarter was a 40 basis point improvement in terms of maintenance and repairs theres two sides to that Theres the fleet side and the non fleet side on the fleet side. We continue to a couple of things are benefiting us one is true.
Speaker Change: Deliveries have been more consistent now than they've really been since sort of pre COVID-19. So, it's allowing us to plan more strategically for assets coming into the system and going out of the system I will add when we talk about and this is a big part of our strategy, we talk about residential automation the configuration of that vehicle, replacing a rear loader Ken.
Truck day, one is going to be more expensive to run than a traditional real order, but what's important to take away from that as we look at it both from an MSR perspective, but we also look at it from a total cost of operation on a per unit basis. So when you double plus the efficiency, we may be willing to pay more to maintain a more complicated vehicle with different technology in it.
Speaker Change: It's driving overall CPU performance, which you are seeing and you're clearly seeing it in the margins in residential I think I'm going off the top of my head here, but we were up about 300 plus basis points for the quarter to 9% less volume and so when you. When you wrap all that together you are right there are still opportunities in maintenance or repairs, but we do we do backstop that against.
Speaker Change: Our overall total cost of operation goals and year to date, our maintenance and repair cost.
In this environment or flat effectively on a dollar basis. So it's a good indication of getting leverage off of the truck deliveries and we expect that momentum to continue into the year ahead.
Speaker Change: That's great color. Thank you very much for taking my questions.
Speaker Change: Sure.
Speaker Change: Thank you.
Speaker Change: Our next question coming from the line of Trevor Romeo with William Blair. Your line is open.
Trevor Romeo: Hi, good morning, Thanks, so much for taking the questions here.
Trevor Romeo: Maybe we can work going back to the strong landfill volume growth in the quarter.
Speaker Change: The global Commvault corporate loans, the MSW up almost 6% the strongest you've seen in a while to be and I think you mentioned there was some strength in the Midwest.
Speaker Change: But I was just wondering if you could talk about those landfill dynamics a bit more was there anything unusual or one time in the quarter.
Speaker Change: However, I would tell you.
Speaker Change: We saw pretty consistent landfill performance through most of the organization. We pointed out there was three or four areas sort of in the middle of the country. If you will that we're the ones that drove the outside performance. One in particular is now a rail served operation that we got opened last year and we're starting to see continued volume growth there and that was a chunk of it that really.
Speaker Change: <unk> two <unk>.
Speaker Change: The network planning aspect of what we do with our post collection sites and you folks have heard us talk about that a good bit. So one of the slugs. If you will volume that helped us in the last couple of quarters is us opening up another intermodal facility in the Midwest I think Jim commented to our special waste volumes were strong.
Speaker Change: A good part of that volume was flowing through a handful of those same regions in the middle of the country.
Speaker Change: Got it. Thank you that's helpful. And then just one quick follow up on the sustainability Capex it sounds like thats going to come in a little bit higher than we anticipated earlier this year the $950 million. This year and then the $3 billion. Total just wondering is the increase mostly related to cost inflation or something else. There just any more.
Speaker Change: Details on what's driving that thank you.
Speaker Change: If the mix primarily on the renewable natural gas side related to cost inflation on the construction of the plant and then also some higher cost on utility interconnection those utility interconnects are our electrical interconnect and our natural gas interconnect. So it's really those two categories.
Speaker Change: And then I would say the 2024 increase specifically relates to our intentional acceleration in some of the spending into Q4 as we complete these projects and accelerate.
The ongoing capital investment at the remaining portfolio. So that is really timing related it's not an indication of the inflation that terrorists, okay, but we're still on track, though too we said last quarter. We expected by the end of this year. We would have spent about 75% of the total capital that is still the case.
Speaker Change: Almost right at 75%.
Speaker Change: And then.
Speaker Change: Because of the lag of course, we won't have realized the EBITDA, we will only have realized about 15, a little bit more.
Speaker Change: About 15, or 16% of the EBITDA that $800 million.
Speaker Change: So thats part of why we're so encouraged about $25 26, and 27 is is that you really start to see not only the EBITDA growth.
Speaker Change: But also the free cash flow growth because the Capex really goes away after for the most part goes away after next year and EBITDA really ticks up.
Speaker Change: And free cash flow.
Speaker Change: Yes, yes makes a lot of things alright. Thank you everyone. Appreciate it thank.
Speaker Change: Thank you.
Speaker Change: Thank you.
Next question coming from the line of David Manthey with Baird. Your line is now open.
David Manthey: Thank you good morning.
David Manthey: It was asked earlier and I am not sure if I caught it but did you quantify your expectations for the net impact from Hurricanes in the fourth quarter and into 2025 or could you.
Speaker Change: Yes, David.
Speaker Change: There is nothing that right now and that we've quantified for the balance of the year or obviously 25.
Speaker Change: These storms were obviously historic in a lot of ways, but.
Speaker Change: First and foremost our people are safe our assets were largely untouched first and foremost in terms of the cleanup. We continue to talk to the teams across the southeast and specifically, Florida. There may be some benefit down the road here, but I don't think it's going to be similar to anything we saw with hurricane in for example, but there's none.
Speaker Change: And then our outlook right now regarding any volume, we would potentially get from those events.
Speaker Change: Okay. Thank you.
Speaker Change: The second is the industrial vertical a potential source of upside for you as we get into next year or so.
Speaker Change: If industrial production starts growing low single digits like maybe you saw in 2012 or 2018 coming out of a downturn would you expect industrial volume growth to turn positive in that type of environment.
It's hard to say, whether it would turn positive but.
Speaker Change: Certainly this quarter we reported.
Speaker Change: Negative $4 one.
Speaker Change: For the roll off line of business side that and we've been pretty consistently in that negative three five to negative four five range.
Speaker Change: It does tell us that while the overall economy has been pretty healthy.
Speaker Change: Real economy, not so much and thats a good thats been a not a good but it certainly has been a sign of that.
Speaker Change: I think you can expect to start to see that come back now will it go positive don't know.
Speaker Change: A big number to make up but.
Speaker Change: I would expect it will start to see industrial come back and by the time, we get through the election cycle. There's there's the uncertainty is kind of out of the system.
Speaker Change: Then I think we could start to see the industrial economy picked back up and from a macro perspective I do think some of the interest rate.
Environment will be an interesting watch point for us with things like housing starts.
Speaker Change: Lagging recently and if you could start to see some momentum there.
This morning isn't all that favorable so it's one of the things that we have our ion because this really is about the temporary side of the industrial part of the business rather than the permanent side.
Speaker Change: On the other line or is that of course, that's been negative has been residential so and thats more by design and that was down two 9% for.
Speaker Change: For the quarter, it's been down in that range for I don't know John.
Speaker Change: Yes, two years and I think John's been asked the question before when do you expect that to get back to more of a breakeven if that is by design. He even mentioned it in his script.
Speaker Change: We are.
Speaker Change: Some of them were letting some of the business go that has been underperforming business that's been ongoing for two or three years now.
Speaker Change: John It's probably safe to say that we could expect to get back to flat maybe in the end of 'twenty five 'twenty six is that fair, yes, I mean, the team has done a great job, we've got a really healthy inventory.
Speaker Change: Contracts that were not performing up to par and I think we'll continue to see it moderated a bit if you look at year to date and quarter over quarter a bit.
Jim Fish: But when you look Jim at the at the benefits from efficiency safety and overall margin improvement, we're going to we're going to stay on this path until that line of business competes with the other collection lines, which has been kind of our mission since day one.
Jim Fish: Alright, thanks very much.
Speaker Change: Okay.
Speaker Change: Thank you and our next question coming from the line of conduct Gupta with Scotiabank. Your line is open.
Speaker Change: Thanks for taking my question and Echo macro observations on a good quarter.
Speaker Change: I wanted to follow up on sustainability Capex.
Speaker Change: Just like two parts, maybe there I think if I remember correctly your original $2 $2 billion Capex envelope.
Speaker Change: 50, 50, LNG and recycling today, that's about $3 billion total what's the split light.
Speaker Change: LNG and recycling there and then I think you mentioned that 75% of the Capex would be done by the end of this year with 75% of the $3 billion Thats, new number or that's too quick too.
Speaker Change: Yes, so the original number the breakdown was roughly one two from renewable energy and $1 billion from recycling and so today the increased number two 3 billion.
Speaker Change: 75% is based on the $3 billion and the split is roughly one four for recycling and one six for renewable energy.
Speaker Change: I think we're seeing that difference.
Speaker Change: Tara is.
Speaker Change: Some of it's inflation, but a portion of it is for example in Ontario, right I mean, its new plants. So it's not really an apples to apples when you compared to $3 two point to a piece of it is related to inflation, but a piece of it is adding new facilities, adding new facilities with the Green point, Jim and also which seems the plans with them.
Speaker Change: The renewable energy portfolio. So the plant mix was slightly different.
Speaker Change: And Thats one of the reasons. If you go back to the Investor day deck, we were projecting $740 million in EBITDA and that got moved to 800 million. So it was one of the reasons why.
Speaker Change: That was more contact setting if you go back to you in the Investor day, but.
Speaker Change: The numbers that we've outlined in the mix of plan on both sides are different.
Speaker Change: Okay.
Great. Thanks.
Speaker Change: If I can quickly follow up on housekeeping on margin side of things.
Speaker Change: Three 5% so it's a great number for Q3.
Obviously your implied Q4 is about 30% call. It maybe you can do a little bit better there, but exiting 'twenty four youre looking at 30 ish kind of the margin right now.
Speaker Change: Knowing what you know today and like post election commodity et cetera is it fair to expect that the margins can trend sort of inline with what you have seen historically that sort of expansion in 2025 organically excluding <unk> cycle.
Speaker Change: Yes, it's a great question and thank you for excluding Stericycle, because it's too early for us to say.
Speaker Change: So what I would tell you is that over the long term, we targeted 50 to 100 basis points of margin expansion in the collection and disposal business and when we look ahead.
Speaker Change: All the conversation about the strong execution on efficiency and retention that have driven.
The best operating expense as a percentage of revenue really that we've seen in our company's history. We expect that to continue and we expect that to be a driver of continued growth in the year ahead. The one caveat that I have to to that and it is an important one because it's larger for us than it is for our competitors.
Speaker Change: <unk> is there is the exploration of the alternative fuel tax credit in 2025, that's about $60 million of EBITDA and a 30 basis point headwind to margin in the year ahead. So the 50 to 100 I would tell you bring down by that 30 basis points for the range, but we're targeting that.
Speaker Change: <unk> execution for 2025, and then when we look at the sustainability businesses.
Speaker Change: Incremental upside for us and we see the sustainability businesses. The renewable energy business provided 30 basis points of margin expansion for us in the third quarter of 2024, and we think when we look ahead to our full year contribution from the five facilities that Jim and Tara I have talked about.
Speaker Change: Bringing online by the end of 2024, we see another 30 basis points of expansion from this level.
Speaker Change: That's great color I'll leave it there thank you.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question coming from the line of Jameson with TD Colin Your line is open.
Jameson: Hey, good morning. Thanks, guys. So you touched on this but now that you've had some more time to spend on Stericycle I'm wondering if there's a reason why this business might require a structurally higher SG&A cost structure as a percentage of sales relative to wm.
Speaker Change: So I think it's really a great point and it's one that.
Speaker Change: We're not taking for granted and I think it's their ERP journey is one that has gotten a lot of attention.
Speaker Change: Rightfully, so both internally and externally and bringing all of their disparate businesses.
Speaker Change: Onto a single platform has been a significant undertaking and we're commending them for all of that hard work in that effort.
Speaker Change: I would tell you is that when you have that kind of an undertaking for call. It a two and a half to $3 billion revenue business and.
Speaker Change: You compare that to a similar undertaking for our 20 billion plus dollar business. That's one of the things that will be structurally different between the two and we anticipated that when we evaluated the acquisition opportunity that really is the one that we think stands out the rest of it we think there's tremendous opportunity and upside to.
Speaker Change: Use the Wm way so to speak in order to optimize SG&A as a percentage of revenue long term.
Well <unk> said before Dana that's really the ultimate comparison once you get past the ERP rollout. They also on comparison would be to one of our areas as opposed to our corporate SG&A, which came in at eight 9% and our areas James operated 5%. So it's why we're enthusiastic about.
Speaker Change: What SG&A as a percent of revenue can look like for us and what the synergies are associated with that I think Terry makes the right point about.
Speaker Change: Davita make somebody pointed out.
Speaker Change: ERP and that having to get fully rolled out and theyre being cost associated with that but but once that is complete.
Speaker Change: There is no reason to start that we want to start to think about the stericycle arm of our business looking more like one of our areas.
Speaker Change: With respect to OCC can you update us on the portion of the value that that makes up in your recycling revenues and has that changed at all with your new recycling facility upgrades.
Speaker Change: So it represents about 55% to 60% of our overall blended value and what has changed over time with our automated investment is we're able to capture a bit more OCC through some of the quality improvements that we've made and our plans and move.
Speaker Change: It's really more of our mixed paper to a higher value.
Speaker Change: So that's been a real bright spot for us when you think about our automation investments.
Speaker Change: Thank you Tara and just just to clarify so the OS So OCC and mixed paper sorted office paper that all sort of are you, saying like the the fiber base is 55% to 60% of the value or just OCC.
Speaker Change: Yes.
Speaker Change: All together.
Speaker Change: TC specifically, okay. Okay, great. Thank you very much I appreciate it.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of Tobey Sommer with <unk> Securities. Your line is open.
Thank you.
Speaker Change: Our motivation process for fleet supply chain and employee retention is normally played out do you think there is an incremental.
Incremental opportunity for retention to improve further into next year and I was hoping you could contrast, the company's experience with what Youre seeing.
Speaker Change: In fleet supply chain and employee retention and sort of labor expense in the potential acquisition targets that you that you look at.
Yes, it's a good point I think as I mentioned earlier, the fact that we frankly have a stability in our fleet delivery schedule. We haven't had in a number of years is really paying dividends not just on total <unk> as a percentage or CPU, but also in our ability to really manage our asset base better and make sure that we're optimizing.
Speaker Change: The number of assets we have in this case.
Speaker Change: Vehicles.
I mentioned, the one area of pressure, we still see specific to M&A I'm really across labor is still wage pressure, that's probably in the four five to five and a half maybe 6% in some markets. So we continue to obviously make the necessary adjustments there and I think the punch line is our retention for drivers and technicians is around 19%.
Speaker Change: It's a little lower for drivers a little higher for technicians, but even in that environment, we're still bringing the defection of our employees down which is obviously having a.
Speaker Change: A big benefit and then lastly, with respect to the some of the operations. We've purchased I mentioned, a few that we've done this year.
Speaker Change: While they have been really really well run companies I think one of the places we get leverage out of is what you've heard Jim and to me and I'll reference, which is sort of our Wm way playbook.
Speaker Change: And we see that as a way to capture additional value when we go into even a well run operation, but we put the strength of our supply chain, our operating team and all the tools and technology. They come with that's one of the areas we continue to see upside.
Speaker Change: Thanks, Andrew.
Speaker Change: What are your thoughts about incremental investments into harvesting the remaining MBT using the companys portfolio understanding that near term you've got cash uses related to.
Speaker Change: The acquisition led growth.
Speaker Change: That may mean, it's not sort of a near term choice.
Speaker Change: So we are actively looked at and we have a beat on how months.
Speaker Change: Landfill gas that we have that we could really convert into R&D through new investments.
Speaker Change: And it's important to note. The first 20 that we built they tend to be larger plants, where we had more landfill gas. So we're taking a much more prescriptive approach on the next tranche and really evaluating whether or not we should be developing them ourselves or perhaps.
Leveraging our partner for those that's something we'll likely make a decision on in 2025, I think it's really important to make a statement about the cash flow generation power of this business, while we're going to see a step change in our leverage with the closing of the Stericycle acquisition, we expect to return.
Speaker Change: Turn to target leverage ratios within 18 to 24 months of closing the transaction and really when you step back and look at the fact that before adding stericycle to Wm.
Speaker Change: Before the step change that we're talking about coming in 2027 in free cash flow associated with the sustainability businesses were generating over $3 billion annually in free cash flow and so that indicates that our ability to use.
Speaker Change: All at $6 billion over a two year period in order to meet the dividend and then have substantial free cash flow for the benefit of growth for the benefit of balance sheet rationalization and it just speaks to the strong fundamentals of this business and our ability to have strategic runway and the sustainability.
The business if we continue to see the return profile of those opportunities present themselves at the highest and best use of our funds.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: And our next question coming from the line of <unk> with RBC capital. Your line is open.
Speaker Change #100: Great. Thanks, and good morning, just a quick question on the investment tax credits related to a lot of these investments.
Understanding these are sort of being accrued is there any risk to those with the change in administration or just kind of if you can highlight the process to getting those paid or just no guaranteed.
Speaker Change #101: Yeah. So we're not thinking about there being risk associated with the change in administration.
Speaker Change #101: But that certainly is something that could be on the table, but it's very difficult for us to be able to project, but with regard to what we've been accruing theres a $145 million in 2024, and that's showing up both as a reduction in cash taxes and a reduction in our provision on the income state.
Speaker Change #101: <unk>.
Speaker Change #101: We see the downside risks associated with really two things one is solely timing and if we saw one of our projects slip into 2025 in the first quarter, we wouldnt get back.
Speaker Change #101: Now the complexity of the IRI and specifically the applicability of the domestic content rules, we've evaluated those and we think that the team is doing all of the right work.
Speaker Change #101: But the Devil's in the details when it comes to tax legislation and so while we think we've done the right thing it will come down to interpretation, we've taken that into account as well.
Speaker Change #101: Providing our guidance, but that won't be finalized within year that will be something that continues as we have the IRS review our findings.
Speaker Change #102: As a reminder, that last part that Sabrina mentioned, it's the difference between 30 and 40%.
Speaker Change #102: And.
Speaker Change #102: So we're confident we would get the 30% is really just the difference between 30% and 40% of the ITC.
Great No I appreciate that color and then just a question as a follow up to the earlier discussion around base business margin improvement and the offsetting impact from stair cycle I guess as you get a closer look at the business would you come back maybe after it closes potentially Q4 reporting and maybe give a path towards how long it may take to get <unk>.
Speaker Change #102: Consolidated margin sort of back in positive territory or is that something may evolve over a few years trying to get an understanding of.
Speaker Change #102: How you think about consolidated margins in the journey over the next couple of two to three years or however, you look at it. Thanks.
Speaker Change #103: Yeah, I think what we'll do is I mean, there I believe the last I looked there margins are kind of in the 17 16, 17% range something like that so.
Speaker Change #103: And when you start looking at.
Speaker Change #103: The opportunities we have with the synergies.
Speaker Change #103: We have not as as Davina said earlier had a chance to look at their customer base at all so we don't know what that what that means in terms of cross selling.
Speaker Change #103: Or any of top any of the topline but.
But we do think that.
Speaker Change #103: We can improve it from where it is today.
Speaker Change #103: <unk> are today because of those things.
Speaker Change #103: I think it will take us.
Speaker Change #103: At least until February to be able to assess what stericycle. We think will look like for obviously for 25, but into 2006 2007, when we'll be able to get back to.
Speaker Change #104: 30% on a combined basis is a little hard to say as Dino said, you do have something working in.
Speaker Change #104: Our favor, which is the sustainability businesses and then our own.
Speaker Change #104: Improvement through the use of technology in John's gone through a lot of the operating improvements so you've got things working in both directions.
Speaker Change #104: I think it's very hard to say what the what the margin will be right now, but I think when we get to February when we give guidance. We can give you a better idea of that.
Speaker Change #105: Great. Thanks, very much for that.
Speaker Change #104: Thank you.
Speaker Change #106: Our next question coming from the line of Stephanie more with Jefferies. Your line is open.
Stephanie Moore: Hi, good morning, Thank you.
Speaker Change #106: One maybe.
Speaker Change #108: What is the level of your question for me.
Stephanie Moore: Maybe the incremental.
Stephanie Moore: How much they provided about the updated claim activity at your.
Stephanie Moore: New recycle facility productivity or.
Stephanie Moore: Is there anyway.
Stephanie Moore: What some of the facilities are doing from a margin standpoint.
Stephanie Moore: Fully apples to Apple Kevin.
Stephanie Moore: Allocated corporate costs, just so we can see.
Stephanie Moore: Think about truly what the margin differential is kind of three and closed.
Stephanie Moore: That's great. Thank you.
Speaker Change #109: So rather than give you specific margins on the business, but I think is important is that we bring it all together and say from a return on invested capital perspective, and a margin expansion perspective, we've effectively scene.
Speaker Change #109: 10 percentage point increase in the margin of the business post automation and that's a really strong indication of the power of the technology.
Speaker Change #109: And whether that be topline growth or middle of the P&L management and cost reduction we're seeing the benefits on each part of the model and that's about a 10 percentage point lift in margin.
Speaker Change #110: Great No. That's helpful. And then just one quick follow up on OCC pricing expectations for the fourth quarter, what are your underlying assumptions embedded in those.
Speaker Change #111: Our underlying assumptions for our blended commodity basket in Q4 is $85 a tonne.
Speaker Change #112: Got it alright, thanks, so much.
Speaker Change #112: Thank you.
Speaker Change #113: Last question is coming from the line of Brian Butler with Stifel. Your line is now open.
Brian Butler: Hey, good morning waste management, Thanks for fitting me in.
Brian Butler: Hi, Good morning, just just one last quick one I guess on the commodity side now that you've kind of improve the facilities in automation do you have a sensitivity to commodity prices. So if that $85 changes.
Brian Butler: How should we think about the impact on on maybe an annualized EBITDA.
Speaker Change #115: Well the way to think about it and we've done that.
Speaker Change #116: Previously is about 60% of the benefit related to our automation plans, it's really independent of commodity prices and that the labor costs. The uplift that we get on blended value because were producing a higher quality product and were definitely seeing those flow through when we bring in.
Speaker Change #116: These automated plants online.
Speaker Change #116: So there is less of a sensitivity to commodity prices, but there still is a sense that exist in the business.
Speaker Change #117: Okay, and then I guess on the automation side on the automated routes you talked about 800 routes over the last couple of years being automated can you put that in perspective, how many more routes could be automated.
Speaker Change #117: How long would something like that.
Speaker Change #118: I think we've got about 11 more 100 routes that are eligible to be automated.
Speaker Change #118: And I would tell you it's.
Speaker Change #118: At least two years and probably into the third year before we before we cycle through all of them, but as I mentioned I mean from an efficiency margin safety standpoint go down the list, where even though we're trading off a little bit of volume, it's obviously from an investment perspective.
Speaker Change #118: Tastic effort by the team some of it Tom is a function of the contract itself is not it's not necessarily getting the truck, but it's the contract exploration. If you got a contract that has a three year contract that is pick up everything contracted and youre going to transition to a nisl contracts that has to be negotiated by the public sector team and at the end of.
Speaker Change #118: The existing contract.
Speaker Change #119: Thank you and I will now turn the call back over to Mr. Jim <unk>, President and CEO for any closing remarks.
Jim Fish: Okay well. Thank you so much for your for your great questions today.
Feel very good about the quarter feel very optimistic about the remainder of the year and into 'twenty five 'twenty six 'twenty seven.
Jim Fish: We're excited to be at.
Jim Fish: Excited to be in this business at this point, but thank you very much we will talk to you soon and talk to you next quarter.
Speaker Change #120: Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and you may now disconnect.
Speaker Change #120: Okay.
Speaker Change #120: [music].
Speaker Change #120: Okay.
Speaker Change #120: Okay.
Okay.
Speaker Change #120: [music].