Go ahead and get started with the afternoon presentation. Thank you. For those who don't know me, I'm Tyler Brown. I'm the senior analyst here at RayJay. I cover the garbage industry, the rock industry, selected transportation industry. So you'll probably see a lot of me. So far, we've had just waste companies so far, including right now with the largest solid waste player in North America, WM, a.k.a. Waste Management, presenting today as the company's CEO, Mr. Jim Fish, CFO, Devina Rankin. I think a lot of us know Waste Management. It's a pretty, it's one of the few names in garbage that has actual brand value. I think some of you have maybe even seen a golf tournament that is very popular. But today, you know, I just want to talk a little bit about the story.
I know most people probably know Waste Management, but Jim, if we could just start high level, just a little bit about who you are, what you do, we'll kind of jump in with a good lively Q&A. This is to be interactive. If you have any questions, please let me know. I'm happy to interrupt at any time. But with that, I'm going to turn it to Jim, and then we'll just do a Q&A.
Yeah, it is funny how much people recognize the brand because of the golf tournament, and we were there a couple of weeks ago and went well this year as opposed to last year. I would tell you that the company has changed a lot. The golf tournament has changed a lot over the last few years, but so has the company over the last decade, really gone from just being a trash company. It's why we changed the name. I'm not sure that the name changed from Waste Management to WM has taken hold, but part of the purpose for the change was we want to be synonymous with sustainability, but at the same time, and I've said this, I don't know how many times, if you're going to be sustainable, it has to be both economically and financially viable in order to ultimately work.
I saw Jamie Dimon say that at the Business Council two weeks ago, and I felt pretty good about the fact that I've said it a hundred times, and he was saying it maybe for the first time in front of the Business Council. The company has built a number of kind of internal hedges, if you will, so that we're not as impacted by big downturns in the economy, not that we're in a downturn. I said on the last earnings call, we are in a bit of an industrial downturn right now and probably have been for a couple of years, but other parts of our business do act as a natural hedge for us, including the landfill side of our business.
If I think about the next kind of five to ten to fifteen years and what makes this a great investment from here, you know, we're at $235 today, I saw earlier, and the stock was at $30 for eight years. So it's stuck at $30. I thought the stock would never do anything beyond $30, and it's done well since then, but I think one of the natural questions from investors might be, okay, but why would I get on now? I mean, I've missed all of the upside. I would tell you that I'm super bullish on this company. I'm bullish on the industry. I mean, I'd rather you buy us than the other guys, but if you're going to kind of—what I think I've heard Tyler say in the past is you should own the industry.
And part of the reason you should own the industry is because it is, you know, kind of averse to big downturn risks. We're largely, the big players in this space are largely North American, so we don't have the international exposure. You might argue, well, you want to be international, maybe, but this company was international years ago, and we divested most of that. And then secondly, I think it's important that for us specifically, that you look at what we're doing with labor and how we think that if you look at demographics within the U.S. and in Canada as well, the United States has aged 10 years in the last 40. And that's a big, and by the way, not unique there.
If you've ever heard Peter Zeihan speak, lots of countries that we have no exposure to are in the same kind of spiral, if you will, and so what does that mean for us strategically. Well, what it means for us is that we can use technology to reduce and have to use technology to reduce our labor burden. Right now, we're a very labor-intensive business, and I think we have the opportunity to take technology and really start to—and we've started that within the last five years—to use technology to reduce our labor burden. We've reduced about 3,000 positions in a low-impact way. We're not doing a RIF. We just let those positions fade away. I think the bigger number, 3,000 sounds like a reasonably big number. I think the bigger number is going to be over the next 10 years, over the next 15 years.
I've challenged our Chief Operating Officer to have a significant percentage of our heavy equipment fleet be autonomous by 2030, so only five years away, and that technology is here today. Caterpillar, Volvo, those companies have autonomous equipment, so that's a capability that exists. I'd like for us to take advantage of that. If you think about the demographics of that position, you may have heard me say this before, but our average heavy equipment operator is almost 54 years old, and they've increased in 20 years by 10 years, and then on the collection side, something similar. I mean, there is Level 5 technology out there. If you've ever ridden in a Waymo cab, I mean, there's nobody up front, and we can do that with trucks as well.
So I think what you could see is by 2040, if we're $25 billion in revenue today, let's say we're $50 billion in revenue by 2040, but instead of having 65,000 employees as we do today, maybe the number is 75,000. But it's not going to be 130,000. Can't be. And by the way, I think that's a massive competitive advantage for us because the small guys in our space just simply can't make that investment. I think the big guys, maybe they can make it, but I think they'll be fast followers.
Jim, this is why I love you so much. We never quite know what we're going to get, but that is great. I do want to kind of come back and talk a little bit about the core business because there's a lot going on, actually. There's a lot going on here and now around sustainability, around Stericycle. We're going to set those off for a little bit later. But let's just start with the proverbial golden goose, the collection and disposal business. So you talked about the industry being in a good shape, and I obviously completely agree with you. Can you talk a little bit about, you know, the pricing environment more broadly, but maybe more specifically, and I'll leave this for Devina, about your ability to drive margins at a core level with that, you know, better pricing backdrop?
So I'll take the front half of that, and then I'm going to turn it over to Devina. I think when you think, Tyler, about collection and disposal, just talked a bit about collection. Most of what I talked about was on the collection side there with respect to labor reduction. But if you think about the disposal side of our business, and if you think about small players in the space, their big three in terms of their cost structure are going to be their labor cost is number one. Their fleet cost is number two, not necessarily in this order, but labor, fleet, and disposal. And we own the disposal along with some of the other competitors and some municipalities. But that disposal is shrinking, and we are in a really good position when it comes to disposal.
Now, when I say disposal, I'm not just talking about landfills. You automatically think, well, landfills. We're in a really good position and an even better position with the investments we've made, $1.4 billion that we've made over the last three years and a little bit more this year to completely redo our recycle centers, and so that makes those recycle centers even more competitive because it lowers their cost structure. It improves the amount of throughput that comes through and improves the product on the back end. I love the fact that, and we've spent a huge amount of time on making sure that we're number one in the big growth markets. I think we've said in the past that in 16 of the top 20 MSAs, we have the best located disposal facilities.
And that's only getting better for us, whether it's South Florida, whether it's Southern California, whether it's Texas, whether it's Nashville, Tennessee. Pick a growth market, and we are the best positioned in terms of disposal. That is going to have a massive advantage. It's going to provide a massive advantage for us, again, as we think about the next five, ten, fifteen years for this company.
So on the margin question, I think it's really important to start with the outcome. And the outcome for 2024 was 30% EBITDA margin, 37% in our collection and disposal business. And when we step back and say what has created that outcome and what gives us confidence in our momentum and the ability to repeat growth in that over the long term, it really comes down to three things. And those three things are price-cost spread, mix of business, and automation. So price-cost spread, you know, our target is continuing to execute really effectively on core price. And core price for us is our PIs on an annual basis of existing customers. And our ability to price at about 150 basis points above CPI is one of the fundamentals for us that we've just monitored over time.
And with a data-driven approach to pricing, coupled with the fact that our customers are less price-sensitive for our business because it's a really small part of their overall cost structure, whether it's the residential customer, the commercial customer, or the industrial customer, we have price leverage. In the spread part of that, it really comes down to managing our costs through efficiency. And automation is a key to that. And Jim's already talked about the focus that we've had on automation more long term. But what I would say that we've accomplished here in recent years is with onboard computer technology, driving route efficiency, optimizing the route structure, optimizing the back office cost. SG&A has been one of, you know, my focuses as the CFO over the years. And we're now approaching 9% SG&A as a percentage of revenue. And there were days where we were closer to 12%.
So really strong execution on using technology to optimize the cost of the organization from front line to back office. And then when I think about mix of business, the disposal part is really important to that. So whether it's disposal growing because we've got the largest landfill network across North America, whether it's recycling and the role that we have played in changing the business model for the recycling part of the business such that it's not something that's almost thrown in for free, but it does stand on its own. And it's, you know, automation of the infrastructure. It's putting infrastructure in the right markets, growth markets, underserved markets. And it's improving the quality of the product that we sell. You can think of recycling almost like manufacturing.
And the product we sell is higher value today than any of our competition, both because of the quality of our product and because of the scale of the product we put into the marketplace. So all of those things are creating tremendous value in terms of really creating incremental upside for margin over the foreseeable future. And when I add to that the sustainability growth investments, and you think of the renewable natural gas pipeline in particular, you've effectively put icing on the cake of the landfill business with regard to the cash flow generation and margin of what was already the highest margin part of my portfolio. So really strong execution that we just see continuing to have traction over the next five to ten years.
Jim, one question I always get is around volume. So it sounds, you know, definitely good, solid, durable on pricing. What's your take on volume? What would be a good number to kind of underwrite longer term? And what do you think some of the impacts or what have been some of the influences on volume over the last couple of years? Because it's been relatively anemic.
So I think volume basically comes for us from two places. One is economic growth, and two is share growth. I've talked a bit more about the share side of it, and that's why I think as we lower our cost structure, permanently lower our cost structure, it gives us the ability to take share. I do think, Devina and I were talking about this, if you look at large companies versus small companies, if you're looking at the Dow 30 versus the Russell 2000, I mean, I think it's pretty clear that large companies are doing well in today's and have been for the last decade. And small companies tend to struggle. And not that I want that, but it is a reality.
And so being a large company gives us the ability to make those big sustainability type investments that small companies can't, or it gives us the ability to make significant investments, for example, in landfills that other companies can't make and own that portion of their cost structure. So I do think that while the economy, and it's so hard to say what the economy is going to do over the next decade, I just don't know. It depends a bit on what political party is in charge and what happens with, you know, $35 trillion in debt. There's a whole bunch of questions that you could try and figure out. And I'm not sure I have the answer to any of those questions, but I will tell you, I feel really good about our market position and our ability to take share.
That's where I have a high level of confidence. No matter who's in office in Washington, I'm not sure I have a high level of confidence there. So the economy is probably a 1%-2%, maybe a little better, maybe 3% growth economy. I don't know that you'll see, certainly in my career, another 5% GDP economy, maybe if there's a big downturn and so the rebound out of that. But I'm not counting on that. I'm counting on us positioning ourselves to take growth. So that's, you know, kind of the answer to your question.
Yeah, perfect. So let's talk about the controllable. So there's two major things that are going on today. We're going to talk about, and Devina hit on it a little bit around sustainability. So there's been a lot of investment being made both in recycling and RNG. So can you talk a little bit about, you know, how much money you're spending on these green investments and then what does that return profile look like? Maybe we'll start with recycling and then we'll move into RNG.
Yeah, it's a great question, and what I would say is it's about a $3 billion investment over a three- to five-year period with $1.4 billion invested in recycling infrastructure and $1.6 billion invested in renewable natural gas infrastructure, and the $1.6 billion for RNG is specifically 20 projects that we saw providing us high returns. The payback period on these investments is three years, and we're really proud of the strong execution of Tara and the sustainability team and what they've accomplished even to date. You know, what I would say is we're kind of one year out into the right of our original game plan, but that one year out into the right means that by 2027, we expect the total sustainability pipeline to create $800 million of incremental EBITDA for the business.
And so when you think about that $3 billion of capital investment to create that kind of step change in future EBITDA of this business on a year-on-year basis, we're really excited about the payback profile of these businesses. So recycling's a six to seven year payback, and renewable natural gas is a three year payback. And the strong execution by the team in building out that infrastructure has paid each and every dividend that we expected. So the only downside surprise was, you know, in the RNG space, we saw it take longer to get the interconnect infrastructure permitted effectively. So while we deal with that in the landfill part of our business, it just was a little surprising to see the bureaucracy take as long as it did. But that is really the only downside impact. Everything else has gone according to plan or better.
On recycling, it's pretty cool. Jim, you can maybe talk about this. It's a little bit kind of in your opening preamble. I mean, it's, you know, those are some big automation investments. Maybe talk a little bit about what you're doing specifically on the recycling side.
If you think about a traditional single stream plant, one that would have been five years ago that we would have built brand new, it would have had one, maybe two of these kind of automated sorting machines. Optical sorters, I guess, is what we call them technically. Now a plant like Chicago, which was our first next gen plant, has 16-20 of them and maybe as many as 20. It depends on the size of the plant. What happens is you end up, because of that, reducing labor by somewhere in the neighborhood of 35%. That was the impetus behind the investment. I think what we didn't realize was the value on the front end and the back end. That was not really contemplated in the payback.
The front end is how much faster that conveyor belt can move, which is really your throughput. I mean, and so how quickly you can move material through that plant changes dramatically when you have 20 optical sorters versus two, and then secondly, the quality of the recyclables coming out of the back end changes dramatically, so an example of that, Tyler, would be in Salt Lake City. That was a rebuild plant, and everything, all the paper going through that plant was just sold as mixed paper. We put the optical sorters in there, completely rebuilt the plant. That was the second plant we built behind Chicago, and now all of a sudden, a significant percentage, and I don't know the percentage, it might have been half, might have been a third of that paper was now coming through as high grade paper.
A very, very significant difference in the price you're getting for high grade paper versus everything going as mixed paper. That plant has gone from a negative margin to a very, very high and substantial margin. It's maintained over the five years that we've had it in place.
Yeah, very interesting. So switching back over to RNG, one, you know, so this in the $800 million of EBITDA, I think it's about $300 million in recycling, maybe $500 million in RNG. One of the questions that I get a lot is about controlling the risk on the back end for RNG. So obviously there's, you know, RIN prices, there's a voluntary market for selling those renewable molecules. So can you talk a little bit about what you're putting in place to help reduce that volatility long term?
Yeah, what's been really important for us is to think about it in terms of the appropriate level of risk for a business like ours. And I will say that the underlying fundamentals of solid waste give us a lot of appetite in terms of being able to sustain some level of volatility. So that's really important because we don't want to give up all of the upside value that we are creating from this business. That being said, we also want to be very intentional about managing risk. And so we're looking at a nice blend between spot pricing and long term contracts. We don't want to execute all of that at one time.
Really, the way that this infrastructure has been built over a three- to five-year period is giving us a great natural hedging strategy in order to put long-term contracts in place at the right time. We're looking at it on a portfolio approach, much like I do on the debt portfolio and thinking about the right levels of fixed versus floating rate interest. I'm doing the same thing and thinking about my fixed versus floating rate contract sales on the renewable side. We underwrote this based on a $2 RIN. Even in this environment, which there was some level of expectation that with a second Trump administration, we could see some downward pressure on RIN values. We're really happy with what we're seeing and what underwrites that confidence is actually because the voluntary market has been so strong.
And so the voluntary market means that that $2 level is proving to be really conservative relative to what we think the long term sustainable values of RINs will be.
Tyler, one quick thing to add, and that is that just to put it in perspective, Devina talked about $800 million in EBITDA by 2027. That will be likely, we haven't given 2027 guidance yet, but it'll likely be less than 10% of the total entity EBITDA. And here's the amazing part about that. Devina had kind of laughed about this number a lot, but if you think about what that converts to in terms of free cash flow, that $800 million, that's going to be less than 10% of the overall entity will probably convert to somewhere between 60% and 75% free cash flow. So well above the kind of the 50% that we target for the rest of the business. So call it kind of $500-600 million in free cash flow.
In 2012, the entire corporation generated $829 million in free cash flow for the year. Now we're talking about something that's at least approaching that for less than 10% of the business. It's part of why we feel as good as we do about these investments we've made, this $3 billion that we're putting down on sustainability.
Right. And those will, you know, build over the next couple of years. And we'll really start to see that into 2026 and 2027.
Yeah, I mean, pretty big capital investment this year. I think last year was about $900. This year is going to be about $650. But that drops off a lot. I mean, really, I mean, almost every one of those plants will be in 19 of the 20, I think is what Tara says, will be in some form of construction in 2025. There will only be one plant that will start construction in 2026.
Yeah, that's where we start to see the EBITDA inflect and the CapEx inflect down. That's what's really going to juice the cash flow. Perfect. Okay, let's talk about Stericycle. We've got a few minutes left. So if I, you know, go back a decade, I mean, I feel like you guys had made a push into medical waste maybe on more of an organic basis. I'm just, you know, you kind of stepped away from that, though I think you maybe left a lingering small piece. But can you just talk about strategically the interest and the excitement around Stericycle and why that move?
You know, when we look at the fundamentals that we talked about of traditional solid waste, a lot of the volume question that we discussed earlier, that's not the case in medical waste. Medical waste is going to be supported by the aging population and just the increase in prevalence of medical care that we seem to all be needing. And so when we thought about the fundamentals of medical waste, we saw a revenue-driven growth story that would surpass that of traditional solid waste. And WM had organically approached growth in this space. And the franchise that Stericycle had built really made organic competition in this market really difficult. And so while it was an acquisition that was always on our radar, it was one that historically we had seen priced too high for one, but then also mixed with some business that we didn't think was right.
And the last management team we think had done a good job of rationalizing their platform so that it really was focused on two strong markets and the geographies that made the most sense for those, and those two strong markets being regulated medical waste and the Shred-it business. And those are really strong complements to WM. And when we think about regulated medical waste, it really is another collection and disposal business. So very much playing into our core competencies, what we do well and knowing how to drive top line growth to the bottom line, both in terms of EBITDA and free cash flow, we know how to do that with technology, automation, and optimization through logistics and routing better than anyone. And so we knew that this was a platform that could be scaled and that we were the right people to do it.
So it was a great opportunity for us and one that we see tremendous upside from.
Right. So the other side of it is, is I believe the synergy target's already been more or less doubled. So there's probably a lot of synergies right off the top, but longer term, I would think that there's some cross-selling, especially at some of those large quantity generators. But can you talk a little bit about that?
Yeah, I gave the example on the earnings call about going to the doctor and seeing a Stericycle Sharps container and not seeing a WM solid waste container, and this is a large hospital, multiple locations across the U.S. and Canada. That is absolutely an opportunity for us to cross-sell. By the way, we cross-sell today between our industrial business and our solid waste business with big customers like ExxonMobil and BP, so it's something we're used to doing. It's something we're good at. We really haven't built much of that in, but I would tell you we're starting to have those conversations with large customers at the same time as we are making sure that the ERP gets rolled out properly. I think cross-selling is similar to what Republic's talked about with US Ecology.
I mean, I think they've gotten probably more bang for the buck out of that single piece than any other piece of that acquisition. And I would tell you ours may end up being the same.
What really excites me is when you think about the verticals of our national accounts platform. And the national accounts platform is one that's differentiated within WM. It's where, you know, we serve large retailers as an example. And WM looked at healthcare as a segment or a vertical that was underrepresented for us. We're in the low single digits of representation in the national players in healthcare from a solid waste perspective. And so that in and of itself should indicate to you the upside potential from cross-selling over the long term.
Okay, last two minutes. Got to talk about the balance sheet and a little bit about it sounds like if we build that bridge, and you guys have talked about, you know, pretty substantial upside to EBITDA by 2027. We talked about EBITDA this, CapEx that, free cash flow here. There's obviously going to be good cash generation. You guys pay a very healthy dividend, so that'll be a part of it. Can you talk about the other priorities of capital allocation? I mean, is M&A still a priority or will it be more buyback or what should we expect?
Yeah, it's a great question. I think when we think about capital allocation priorities, the dividend certainly is top of the list, but up there equally is the strength of the balance sheet. And when we look at our projected cash flow generation in 2025, we expect to be back to our targeted leverage ratio of two and a half to three times by sometime in early 2026. And so that puts us in a position to have a really healthy amount of free cash flow that can, because of the step down in sustainability growth capital, that can go to a combination of share buyback and M&A. You know, for us, we prioritize organic growth in this business.
So if we see additional places that we can create organic growth through capital expenditures, I think this $3 billion of sustainability growth capital was an indication of our ability to do that with some purpose and create the right returns. So we would prioritize that first, then M&A, then share buyback. And, you know, when I look at the next three years, we just put out our cash flow targets for the performance share units for the executive leadership team across the organization. And we're over $9.5 billion of free cash flow expectations for the next three years. It's an indication of the strength of the free cash flow generation of this business, and we just expect it to grow from here.
Excellent. Great place to stop. I appreciate it so much. Thank you all.