So I'll say it again, but for those that don't know me, I am Tyler Brown. I cover the waste sector here, the construction materials sector, as well as transportation. But this afternoon, I'm extremely excited to have Waste Management, AKA WM, joining us. Presenting today is the company's CEO, Mr. Jim Fish, and Chief Strategy Officer, correct?
Yes.
Mr. Rafa Carrasco. Is that good?
Pretty good.
Pretty good.
Well done.
Pretty good. Pretty good. Well, listen, I know a lot of you- a lot of you know, you know Waste Management. Matter of fact, I would say a lot of you may be getting your trash picked up by Waste Management today. But Waste Management is clearly the largest waste provider in North America, has an absolutely fantastic franchise, best landfill position, you know, across the U.S. A lot of interesting things that are going on, particularly around sustainability. We are certainly gonna get into that, but I don't think we have any slides, but I was just hoping, Jim, if we could kind of just talk a little bit about who you are, what you do, what's special about you. But we did do a home office visit last week. I saw you.
Yeah.
We talked about... I was surprised. I was happy, happy for you and, you know, generally everybody. But, you know, Waste Management, the stock's done really, really well compared to some of the other Dow, Dow players.
Yeah.
I don't know if you wanna maybe mention that, but it's been, it's been quite, quite the run.
So I did run some numbers last week 'cause I also sit on Caterpillar's board, and so I sent a note to Jim Umpleby because I pulled the Dow 30 plus five other stocks plus us. So of those five, it was Amazon, which surprised me they're not on the Dow, but and a couple other companies that used to be on the Dow, like ExxonMobil, GM, AT&T, and compared them. And over five years, and the order looks pretty similar if you look over 10 years. I was kind of surprised to see it, but over five years, top performer was Apple, second was Microsoft, third was Caterpillar, fourth was Amazon, and the fifth was us.
So I sent it to Umpleby and said, "I must be doing something right 'cause, I'm associated with two of the five." But no, I mean, look, we're, we're very happy with how the stock has done. I think the big question for us, and maybe for Jim at Caterpillar, is, okay, so now what? I mean, you know, that's nice and pleased with the performance over the last five years or last 10 years. So how do you, how do you continue that? Why, why should I— Why should I buy now, if I bought five years ago, I'm happy, but if I haven't bought, why should I buy now? And that's, I think, the question that we're answering a lot of today.
And Rafa, it's part of why we put Rafa in this position, because, you know, having somebody that is looking not just, you know, a year or two years out, but somebody that's looking 10 years out and really taking maybe even what is a challenge today and turning it into a differentiator, differentiator for us, is gonna be critically important in order for us to go from whatever, 200 to 400. But we're pleased with the last, you know, 10 years, for sure.
Maybe just a little bit about the business, if we can.
Yeah.
Just maybe we start with the golden goose, the actual just core solid waste business. It's been, it's been good, to say the least. I know that there's a lot of interesting things on the sustainability side, and we will certainly get to that. But can we just kind of start first around the durability around price? You know, and, and what happened and what transpired over the last couple of years that necessitated really pricing? Because there was a, there was a big movement in inflation, and you have how many frontline workers?
Well, we have 50,000.
50,000 ?
Yeah. So probably, probably at least, you know, 42 of those.
Exactly. So a very labor-intensive business. There's been a lot of inflation in the system. But can you just talk a little bit about that durability around price?
That's another question, and Rafa can help answer this as well, that we're getting a lot of. I would tell you that 2022, with inflation at 10%, and I've talked about it this way, it was a bit of a fistfight, just trying to meet inflation with price. And it's the first time in my career, honestly, that we've really looked at the spread between inflation, our cost inflation and our price, because, you know, inflation for as long as I've, you know, been with the company, had been negligible. And now, all of a sudden, we have to pay attention to it in 2022 and the second half or in the front half of 2023. And so it was...
I remember being asked a question on an earnings call: "What's the ideal level of inflation?" And I kind of, a little bit of a smart-ass answer, said, "Well, it's not 9%." So, and the reason, you know, setting that aside, the reason I answered it that way is because trying to get a 10% price increase when your costs are going up by 10% was a bit of a challenge. When costs are going up by 4%, which is what we projected for this year, and getting 6.25%, 6.5% core price, actually is quite a bit easier. So, I do think there's some real sustainability in terms of price. And I've also had the question recently, well, so but how...
In fact, Becky Quick asked this on Squawk Box the day of our earnings, but how sustainable is pricing? But when you think about it, and I'll use myself as an example. At our house, our trash services, not WM, by the way, but our trash service costs $20 a month, and I get twice-a-week trash, once-a-week recycling, and what's called backdoor service, where a guy actually gets off the truck and goes into my driveway, if I want him to. I don't really want him to, but he will. And so I pay $60 a quarter, and at the same time, for a very low labor cost service, which is my DIRECTV bill, I'm paying $200 a month.
So I feel like I have a lot of opportunity to raise price, as does that company, by the way, that's picking me up. I mean, I, I have no idea why they're charging me $60, but even WM might charge $90 for that service, maybe $100 for that service, and DIRECTV is charging me $200 a month, so $600 a quarter for my DIRECTV service, which is very low labor intensity. So I feel like there's a, it's not only is it a very small percentage of, of most people's overall cost or most businesses' overall cost structure, but it's also a, it, it's far below the other services that we're accustomed to paying for.
I'll add a couple of things, Tyler, that, that I think are emblematic of kind of our journey to, to maximize what we can get out of price, right? And one of them is, you think back about the latter part of 2022 and early 2023, we put forward probably 11%-12% labor increases to the front lines. We, we probably experienced about $120 million in unbudgeted increases to, to our workforce, right? So we were kind of ahead of the curve with respect to our competition on that. And, you know, we took a little bit of a beating associated with our margins as a result of that, right? But, but in the meantime, we were also investing very heavily in technology and automation and optimization and technology within our trucks, optimization engines that we now use.
And so what it does is, while we were early to feel the impact, we're also a little bit earlier in getting out of it and being able to implement that technology to maximize what we can get out of the bottom line, and then the impact of the price we can get is felt better in the margin.
Yeah. So on pricing, though, it's not all flexible. So, you know, I, and I don't know, maybe you're in a residential subscription market, it sounds like you probably are. There may be flexibility there, but in some cases, there's a portion of your revenue that you don't have flexibility. So, you know, can you just talk a little bit about what you saw in that piece that is the restricted side, where it kind of lags CPI, so we kind of got a bump in 2023, but then maybe it will have a prescribed, you know, kind of downward drift just because CPI has kind of peaked?
I mean, there is, Tyler, there's about 40% of our business has some index tied to it. So whether it's mostly residential, I mean, a lot of the residential business is tied to CPI or water, sewer, trash, or something that's index-driven. And that does have, in many cases, a lag to it, so it might be a 12-month lag. So when inflation really took off, we're still not getting the price increases. Now, in the back half of 2023 and into 2024, we are getting the price increases and those, and so as inflation comes back down, as will that price, because it, there's it's, it's kind of 12 months behind. I don't know what percentage of the 40% has that lag to it. Let's call it half. I don't know.
But yeah, that piece does—is more restrictive for us. But I think what we've always said is that 60%, we have enough capabilities on the 60% to compensate for the down lag that we'll see coming here in 2024 and into 2025. And so we've never really been too overly affected by that. I mean, we know it's there, but we're able to use the 60% in our benefit to offset any negative.
And Tyler, with most of our municipal contracts, I mean, we do enjoy a pretty strong partnership, and they like the level of transparency of our company. They like the way we're investing in technology. And as a result of that, when we were really experiencing the struggles of this hyperinflation, particularly on the labor side in late 2022 and early 2023, we were able to go to them and extract some price concessions to recover extraordinary costs. What you're going to see, though, in 2024 is that that's going to skew towards the front part of the year, and in the back half, you'll see that kind of begin to taper off.
Really, I'm getting at, you do have some flexibility, and it-
Yeah
... in that open piece, you can really push on that, if necessary. So can you talk, though, a little bit about the unit cost inflation that you are seeing in the business? Have you started to see some disinflation? Can you talk about some of the buckets? And I know you have some idiosyncratic things going on, but can you just talk, like, on the SG&A side and on some other pieces, but can you just talk more broadly about unit cost inflation?
So I'll leave the SG&A question to Jim, but I'll tell you, like, on the operational side, right? We -- but this year, our cost inflation budget for our guidance is about 4%, right? And give you an example of one of those components for us, which is maintenance and repair. But we began to see normalization of that towards the back end of 2023 because we finally got a full allotment of the vehicle replacement trucks and vehicles that we -- usually, that's about 1,700. This is -- that's the first time in about three and a half years that we get a full allotment.
So as you can imagine, that enabled us to actually pull about 1,000 trucks out of our routing system that were older trucks that really required a ton of heavy maintenance and were very costly. So as a result of that, you went from, I think our 2023 numbers were about 9.9% as a percentage of revenue on the maintenance and repair side. Q4 was 9.1%, and we expect that trend to continue as we will catch up in 2024 with truck deliveries. That's just one example.
Yeah. I don't know, you know, there's been some idiosyncratic opportunities with automation, and I think there were some SG&A opportunities, but, you know, I don't know if you can speak a little bit to the progress made on those.
Well, we've made a lot of progress on SG&A over the years. You know, well, not too long ago that we were at 12% of revenue, now we're at 9% of revenue. And we think there's some opportunity to go below that. Aspirationally, we have, you know, kind of 7.5% as a goal out there. I don't think we get to 7.5% next year, but but I think we can get to 7.5%. But it—to me, it is why... By the way, not just WM, but all big businesses in the United States seem to be, not all, but big business seems to be flourishing.
So if you look at just the Russell 2000 versus, you know, the big, the Dow or versus the S&P, I mean, the S&P continues over the last probably decade to far outperform the Russell 2000. And part of it is that big business seems to have this increasing advantage, and I think we're in that category. If I think about why we have an advantage, and I look at part of what Rafa does, is he focuses on where we have challenges that can be turned into an advantage. The very obvious one that we've been focused on for about 5 years is labor. And if you think about labor, every company is facing these labor challenges, but not all companies are able to address it the same way. Technology is an investment that we're making to help us address labor.
We've talked about kind of 5,000-7,000 jobs coming out. That does not get replicated easily by some of these small businesses, which is why when we talk about M&A, and we've talked about some of these examples of us buying companies that never would talk to us in the past. I mean, three generations of folks in a business, a small waste business, that would never even talk to us about an acquisition, and all of a sudden, they're approaching us. And there's a couple reasons for it. One is, one might be they expect, you know, taxes to go up. One is that, you know, maybe the cost of capital is going up for them and their...
But one of the big ones is labor, and they are not able to. These trade positions are not easy to hire anymore. Our average heavy equipment operator today for WM is approaching 53 years old, and that's up from the mid-40s a decade ago. So in 10 years' time, the average age has gone up five years. So pretty soon, we're gonna run out of heavy equipment operators, as is our competition. That's a risk for us. It's a challenge for us, but it's also a huge opportunity, which is the way he thinks, which is, oh, what's an opportunity that today is a risk, tomorrow can be a differentiator? And so that's honestly when I starting this conversation talked about, so why should I get into this stock at $200?
Because I think there's an opportunity for the big guys. I'm not here to sell Republic and Waste Connections to you, but I think there's an opportunity for three big companies in this industry to really kind of run away from the pack.
Yeah, and I will say that the ones that started that digital journey the earliest probably stand to gain the most out of it, and we started that journey early, probably five years ago, and certainly in earnest, about three or four years ago. And to the point about managing the middle and managing costs, I mean, part of what we've done, what you saw begin to pay dividend in Q3 and Q4 last year is that those things are finally coming to fruition.
All that work that we did in retooling the technology within the cab and adding capabilities, digital capabilities to our dispatching functions, to enable routing for our industrial line of business to go through an optimization engine and actually create the efficiencies on a daily basis to be able to actually integrate, say, for example, HERE Maps in sort of the first of its kind for our industry anyway, route, turn-by-turn, traffic avoidance, tool for our drivers. Those, those things don't just happen overnight. They take a pretty long incubation period, and we're there, sort of at the cusp of actually beginning to capitalize on that.
Yeah, and it's not just technology, 'cause we talked about this last year with Kelly, Jim.
Yeah.
I think we talked about you have a balance sheet. You know, you pay very handsomely. There are career opportunities. I think you even pay for college in some instances.
Well, not just for the employee. We pay for college for the employee's children, and that's a big deal. I mean, it's one thing if I come to you and say, "Hey, Tyler, you know, congratulations, we're gonna pay for your college." You go, "Okay, thanks. That's nice." If I come to you and say, "Hey, we're gonna pay for your three kids," that's different. And so that was a benefit that we've added. We really, there's a lot that has to be. I mean, part of this is cultural for me, personally, for Rafa, is wanting to make this a great place to work. Part of it is competition. So while I care about 50,000 people deeply, part of it is competition.
When I think about those small companies, they can't afford to go pay for you know three kids. I mean, let alone pay for the employee's education. But to say, "We're gonna pay for your three kids," and by the way, it's not just the local community college. I mean, we'll send them to the University of Washington. If I look at the number of. There's a group of colleges that we'll send them to. We'll send them to Texas A&M, University of Washington. I mean, there's, I think Brown University is in there. So I mean, some top-notch schools, and we'll pay for that. So it's a further way of differentiation for us versus the small guys.
Tyler, I always like to anchor on some milestones-
Please.
of how all that culture and all that investment in our people is paying off, and I think Q4 of last year was 18.4% driver turnover, the lowest in over a decade for us. That's pretty strong.
Wow! Yeah, that's a great stat. So where is the manifestation of it, though? Will it be... You talked a little bit about M&A, but will it also show up in volume? Because I think last year we talked about volume, and you thought that over time, that could be a differentiator on why it may, it may end up remunerating or manifesting in volume.
Yeah. I think volume, I mean, it has. It's not a surprise. I mean, volume, and I think the economy as a whole has been relatively weak, and I don't know that I'm seeing a lot of strength in the economy. I feel like the Fed is going to, you know, they've clearly indicated they're pausing on interest rates, and I'm not sure we see the Fed lower rates in 2024. Maybe I'm in the minority here, but I'm not sure we see the Fed lower rates. And I think part of that is this inflation discussion we've just had. When it comes to volume and when it comes to picking up share, which then should be reflected in volume numbers, we haven't seen fantastic volume. Hasn't been terrible, but it hasn't been great.
And there is, by the way, a price elasticity impact here. Now, our customers are largely price inelastic. It doesn't mean that we don't lose customers when we raise price, but all of you took you know a microeconomics class, and you understand that when the price elasticity doesn't mean you don't lose volume, it just means that volume that you do lose, you're still ahead with the price that you've taken. And so we do lose some customers, and we do have some churn as a result of our pricing program. I don't ever want to get to a point where I'm not losing any volume, because that means I'm not raising prices high enough.
I think you'll continue to see volume kind of tick up slightly, but as we take greater and greater share, as these companies that we buy... Rafa mentioned 18.4% turnover. We bought a guy last year who had 60% driver turnover. I mean, and that's why, and that's the example of the guy that was a third-generation trash company. And I asked him, I spoke to him and said: "Why, why'd you choose to sell to us?" And he said, "I feel like I'm an HR coordinator. That's all I do, is hire drivers every day because I'm turning them over. I'm turning 60% of my drivers over." So-
That was when he was able to get back to you, because most of the time, he was running around his shelves-
Exactly.
and he couldn't call them back, so.
So I think that buying those types of guys who now won't get back in the business... And by the way, the other thing he said was, "My kids don't want it. They don't want the business. They just want the money, but they don't want the business." So, you know, they'll go travel to Italy. But I do think you will see that volume pick up for us. But in the near term, what you'll see is it's going to be reflected in price, and we will lose less volume than we used to lose. It's why, Tyler, we keep talking about on all these earnings calls, our churn is really at historic lows, while our price, in absolute terms, is at historic highs.
I think that's where, in kind of a weird way, you're seeing us pick up share. We're losing less volume with 6%, 7%, 8% price than we would have lost in the past. In the past, I think you would have seen us in a volume negative place. Now, you're seeing us in a volume positive place, even with that type of pricing increase.
Yeah. So to sum this up, to sum this up, though, I think you've thrown out 5%-7% organic, solid waste, kind of, excluding any externalities. It feels like that is very doable. The big probably get bigger.
For sure.
You've got good pricing power. Maybe you lose less on volume, so it definitely feels like that algorithm is very much in place.
Well, so we threw out 5%-7% EBITDA growth, organic EBITDA growth at the Investor Day that we did, you know, several years ago. And this year, we're talking about 7.7%, I think, is the number we threw out there. And that is pretty much... I mean, there's no carryover, really, from acquisitions. We didn't do much in the way of acquisitions, so that's pretty much mostly organic. I mean, almost all organic, which is why I feel like this focus on the middle of the P&L, until the economy really kind of starts to kick back in, focus on that cost structure, get operating costs down to... We talked about SG&A with an aspirational number of 7.5%, OpEx with an aspirational number of 57. Will we get to 57 or 7.5%?
Certainly not in the next year or two, but I absolutely believe we can see our SG&A number down below 9, and I think you can see our. We're right on the edge of getting OpEx down below 60.
Yeah. But to be clear, I mean, you do have a big green CapEx program, you know.
Yeah
That's going to yield substantial EBITDA. So that, that would be it on top of that organic piece, correct?
Yep.
Yeah. So maybe we can talk a little bit about that. So you're spending... I forget the numbers right off the top of my head, at least $2 billion between RNG and recycling.
So 900, I think, is the number this year. Is that right, Ed? $900 million this year in-
Right
-CapEx.
Cumulative, but yes.
2.8.
Sorry?
2.8 or so.
2.8-2.9 is the total number, but this year-
I see.
is going to be, I think, $875-$900.
Okay, so a big CapEx.
This will be the biggest CapEx year for those-
Right
sustainability investments. And I, and I think those, you know... And then when we really turn the corner in terms of, if you want to think about it, as a cash flow equation-
Sure
... next year is when you really kind of turn the corner and go cash positive. We had these big capital investments last year, a little bit, you know, less than $22, but the biggest year of all will be 2024. And then, all of a sudden, the earnings stream really kicks in, particularly with RNG.
For those that may not be familiar, can you talk about what it is on the recycling side that you're doing, and then what you're doing on the RNG side?
Yeah, why don't you start?
Yeah. So there, there's two components to this. The RNG side, I'll let Jim speak to that, and then there's recycling side, as well. So, for example, between 2022 and 2023, we basically worked on automating 10 facilities, adding capacity, throughput. And by the way, when we do that, we experience benefits on labor savings of about 30%+. We experience additional premiums to our commodity value, just in by way of quality. We also added 3 new markets entirely. In 2024, we're going to do the same. We're going to have 10 more automated facilities that are come online, and then three new marketplaces as well. So for 2024, we expect that that'll generate some...
That, in conjunction with the existing business, will generate about growth of about maybe $55 million, if I'm correct, on the EBITDA line. And then those investments continue-
Sorry, numbers guy over here.
Yeah.
We keep looking for it.
We keep looking for it. Yeah. And then, so that will continue then to generate sort of run rate annualized benefits in 2025 and, and beyond.
Just a little bit on the RNG. Just, you know, this, this is turning what was kind of a cost into a resource. Maybe just talk a little bit about that investment and some incredible returns on that as well.
Well, look, these landfills generate gas. I mean, that's what they do. So the trash decomposes and generates gas. And for many years, probably two decades at least, we've been taking that gas and doing a couple things with it. We've been collecting it through gas wells and putting it through a gens et and then turning it into electricity. That's been kind of the primary renewable source of the gas or output for the gas. And then the rest of it gets flared off. And so flaring off doesn't do anything. It doesn't do anything for the environment. It doesn't do anything for our income statement. This opportunity came along largely because of the sale of these D3 RIN credits.
So if you think about this, this, $510 million, which is, I think, the number we've given in EBITDA for renewable natural gas, about 90% of that comes from the sale of the RIN credits. The other 10% comes from the sale of the gas. That might surprise you a little bit. You'd think that the gas would be more of it, but it's actually 90%-10% at this point. And the reason we're able to sell so much in terms of those RIN credits is because the way the credit is generated is when you burn the natural gas in our fleet, and 75% of our fleet is natural gas. So comparatively, we're able to generate far more RIN credits than would a company that has only 25% of their fleet being natural gas.
So once we burn that natural gas in our fleet, then it gives us the ability to generate a credit, which we then turn around and sell. And therein lies kind of this opportunity that's. I don't wanna kind of make it sound like we're a drunk walking down the street and stumbled across a $50 bill. But you know, we did pick it up. And so that's basically why we've got this renewable natural gas business. At the same time, we can check a box on sustainability. We already check a big box in terms of the biggest recycler in North America. Now, we check the biggest renewable natural gas provider in North America. And then lastly, it provides very nice returns for us.
It, it's a little bit of why we haven't done a lot of M&A, because would I rather invest capital dollars that, in a business that has a 3x or 4x multiple to it, versus buy a business for 10x, 11x, 12x? I think there's an obvious answer to that.
So maybe just here in the last minute or two, I mean, to talk about the bridge and to take a walk. I mean, you- we've already talked about a very durable organic story. You've talked about the layering on of some upwards of $1 billion of incremental EBITDA from this stuff. I mean, there's no reason to believe, and I think you've already laid it out, I mean, this could be north of an $8 billion business, circa 2027-ish. But at the same time, and you talked about it, there will be a massive reduction in CapEx, so the cash flow should be substantially better than it is today.
Yeah, the cash conversion is tremendous from this. I think the big question, and we were asked the question on the call, was: Would you ever monetize this business? And my answer has always been, it's an option for us. We have several options. Right now, we're focused on option A, which is building these facilities, but it's always an option, and if somebody offered me a ridiculous number for it, then we might consider that option. But for now, what we're focused on is building out these plants. We have, I believe, 5 new RNG plants coming online. But between recycling and RNG, Tyler, we have 40 plants in some phase of construction, maybe starting at the end of this year, maybe they're already ongoing and about to be turned on.
But 40 recycling and RNG plants in some phase of construction, that's a lot, and it's why we've talked a little bit about, you know, about supply chain being a challenge for us, which I think has loosened up a lot. But, yeah, I like—I like both of these businesses. I love the stats that Rafa went through on recycling. You know, as we talk about labor, 30%-35% reduction in labor when we rebuild these recycling plants. That's, that's something, by the way, that these small companies can't do. They can't. You know, some of these, these plants cost $60 million to rebuild.
Yeah. Well, I think we are out of time. I appreciate it. There is a breakout, so if anybody wants to continue the discussion, see you downstairs. But thank you, guys, so much.
Thank you.
I appreciate everybody for coming.
Yeah.
Thanks, Tyler.
Absolutely. Thank you, Tyler.