How's this? Okay, sorry about that. I'd like to reintroduce Ed Egl, Head of Investor Relations at WM. WM is based in Houston, Texas. It's the largest waste service provider in North America and has the largest landfill network. Ed joined WM in 1995 and has been in his current role since 2014. WM has 400 million shares outstanding, trades around $230 for a $93 billion market cap and $23 billion of net debt. They should do about $26 billion in revenue this year, almost $8 to $9 billion in EBITDA and about almost $8 in earnings. Ed, welcome, and thank you for being with us today.
Thanks, Tony. I appreciate the ability to present while not in person, virtually. I appreciate you accommodating me, still being able to present there.
That's great. We are very happy to have you. Maybe at a high level, Ed, I know we've, you know, I think people are very familiar with the brand. Obviously, you guys are pretty well known throughout the industry and throughout the U.S. If you could just, at a high level, tell us about what you do, maybe some more background.
I want to start by kind of correcting a little bit that you said there for our guidance for this year coming up. You know, we're going to be around $25.7 billion-ish, kind of at the midpoint of our guidance on the revenue side and about $7.5 billion, $5.0 billion, roughly, kind of at the midpoint for EBITDA, just to clarify that a little bit. Look, we're North America's largest environmental solution service provider out there. We have a large footprint in our traditional collection and disposal operations. Think of commercial, industrial, residential, picking up trash and disposing of it at our landfills or transfer stations. We're North America's largest residential recycling company as well, so picking up residential waste and sorting that at our facilities. You know, we just acquired, and I'm sure we'll talk about this, a large medical waste business, Stericycle.
That's going to add to our service offerings to allow us to have a more complete service offering to our customers. We've dabbled a little bit in some technology and automation in our recycling facilities and our renewable natural gas projects. Those are all things that give us excitement going forward, you know, looking into the future.
That's great. Great overview. Maybe we could talk about the pricing environment and give an update there. You know, how have discussions with customers been going in a relatively inflationary environment?
Yeah, if you think about it, most of our customers understand that we have to recover our cost of processing or our cost to serve them. A lot of times those customers, our service to them is less than 1%, particularly on the commercial side, of their business cost, right? A restaurant, you know, less than 1% of their service to them is what we're going to provide for them. They do not really notice a lot of price increases across the board there. As long as you're providing the quality of service and providing differentiated service offerings to them, they're not going to really look at the pricing side of the business.
We try to focus on 100 to 150 basis points above our internal cost to serve those customers, above that to get pricing activities that are going to cover those costs, plus get some margin expansion. We haven't seen much change in that. We focus on customer lifetime value here, meaning customers at our term level in the commercial and industrial line of business of about 9% means those customers have been with us for 10 plus years. They have gone through 10 plus pricing cycles. We want to make sure that we treat those customers with the respect that they deserve and price them appropriately, cover our costs, but make sure that we look at all the data and analytics for those customers so that we don't intentionally shove them out of our portfolio.
It gives us a better view into how our service offerings combined with how our customers feel about us from our customer scores allows us to price more appropriately across the board. We haven't seen much pushback just yet on that.
Could you, along that line, sort of discuss these higher value customers you talk about in regards to your ability to use maybe rollbacks, extended contracts?
Yeah, I think what we first look at is how can we become a better partner with those customers. Rolling back is a tool that you could have, rollbacks and pricing. We do not like to go there, but we really look at how can we partner with them to increase the service levels that they have with us, right? They might just be a customer that just has a commercial can with us. How can we add recycling services to them? Or how can we add organic processing or some other service levels there to increase the stickiness of those customers across the board? We do have the toolkits after rollback prices, but we do not use that as the first lever. We look at kind of being that long-term partner with them to create value across the board for both us and them.
You know, discuss your ability for price discovery using your tools, strategies that you have with customers, sort of maybe some of the pricing tools you guys have.
Yeah, so we go back a long ways, particularly on the commercial and, I'm sorry, on the collection and disposal side, right? We've been gathering data. We've had onboard computers on our trucks for a decade plus right now, gathering information about how we service that customer, how long it takes to serve the customer, any operational issues we have with them. We also now use that technology to track kind of what their waste looks like as we're dumping into the back of the truck, right? So we know if they have a recycling can, for example, what their contamination level could look like. So we can provide that data back to them to help them understand why we are pricing the way we are. As everyone's aware of, you know, labor costs continue to go up, inflationary environment still around today.
That's the easy bread and butter that people understand. It's really trying to get the customer to understand what we know about them and how we can provide the valuable service to them and how we can help them become a better customer for us if they're recycling appropriately or throwing the trash away the right way.
Ed, you know, in capturing this price, how does that translate to incremental margin improvement?
We'd like to get that 100 to 150 basis points above our cost to serve those customers so we get that margin expansion across the board. It varies depending on lines of business, right? You look at our open market business, which is about 60% of the pricing. 40% is tied to some sort of index on there. We look to see what those returns are, you know, both on a margin basis and a return on invested capital. That's why I'm sure we'll talk about residential a little bit and why we're shedding some of the volume there. That's why we look at that to make sure that we get that expansion that we expect to earn and our investors want us to see.
Yep. You led me to my next question. Maybe talk about volumes now and discuss, you know, what you've seen in churn rate and what has the trajectory sort of looked like.
Yeah, we do not really get into quarter updates, but I'll tell you from our Q4 Earnings Call, you know, churn was reasonable, around 9%. We've seen it in that 9% level for a long period of time. We're proud of, that's a reflection of our service offering, right? It's not pricing, it is not a reason why customers leave generally. It's because of the service failures that we potentially have. Keeping that at 9% is a really good outcome for us. We'd love to see it a lot lower than that. Part of it is structural that you'll never be able to get rid of, you know, businesses just go out of business, you know, once a year. Getting it lower would be opportunistic for us and provide better value.
From a volume perspective, you know, for the full year, we guided volumes to about 0.25-0.75% in the collection and disposal business. That's about 50 basis points at the midpoint. I'll point out that all of that 50 basis points is really coming from the cleanup in California. Unfortunately, in Southern California, the wildfires, that volume is about a 50 basis point impact to us positively. That means the rest of our business is going to be essentially flat from a volume perspective, but you really need to pull back the layers on the different parts of our business. Commercial business seems to be doing okay, particularly with national accounts. We're seeing it attracting those customers at better pricing and providing value to those customers. MSW landfill volumes seem to be going okay.
Really, the intentional shedding of the residential volumes is going to drag that down. We've been about 3% negative over the last, you know, eight plus quarters there. We've talked a little bit about on our industrial side, seeing a slowdown both in housing and kind of the industrial services sector a little bit. You know, we talked kind of, you know, are we in a mini industrial recession right now? Don't necessarily want to call it that, but we've seen the last two or three quarters negative volumes in the industrial side that gives us a little pause that there could be some challenges in that volume aspect going for the rest of the year.
Yeah. And then y ou know, Ed, you alluded to the shedding, you know, shedding volumes. Could you sort of talk your decision matrix, maybe for those less familiar? It obviously is a little bit counterintuitive, but just maybe talk about how you go about, you know, deciding about shedding those and maybe talk about the national accounts business.
Yeah. The shedding really comes from the residential line of business. If you look probably five, six years ago before we started this process, operating EBITDA margins in that business were in the high single digits, low teens, maybe call it 8% to 12% EBITDA margins. We looked at why is it that the case, right? I mean, these are large chunks of business that we should be able to get better returns on. There's no competition as you have these five to 10-year contracts. Looked at it, a lot of it comes down to price escalators, right? A lot of them are tied to CPI, CPI-U, water sewer trash, things like that, that were not keeping up with our cost of inflation. As John Morris says, the first day of the contract winds up being the best day of the contract, right?
Because our costs continue to escalate, but our price escalators aren't keeping up with it. We made the decision to start looking at that, looking at automating the residential line of business, right? Going from rear loads to automated side loaders, reducing the dependency on labor there, increasing efficiency, reducing safety incidents, as well as making sure we had the right price escalators in those contracts. As I mentioned, we've seen a decline of 3%+ kind of quarterly for the last eight to 10 quarters. However, what I'll tell you is our revenues continue to grow because we got the right pricing escalators in there. We've seen our EBITDA margins grow to close to 20% EBITDA. We don't want to get rid of all of our residential business, right?
We want to make sure we get the right returns and that that business competes for capital just like the rest of our businesses do.
That's a great overview. Thank you for that. Maybe switching to special waste, obviously there's a lot going on. You know, and some previous presenters talked about, you know, what they're seeing. You know, what are you seeing there? Is there some pent-up demand, maybe what your pipeline looks like?
Yeah, the pipeline looks strong and robust. It really comes down to when the municipality or the agency is going to want to let those contracts out, basically, right? You could see delays, right? In the Q1, you'll normally see a little bit lower special waste volumes, right? Just the nature of our business, the cyclicality of it. That does not mean those jobs have gone away. It just means there could be a delay of when we start seeing those volumes kick in. Our special waste volumes have been really strong over the last couple of years, and we think that will continue. It's just a matter of timing-wise when people feel comfortable that they're wanting to continue those projects.
Yeah. And then maybe over to C&D, you know, you're the largest, obviously, operator. What are you seeing currently in the real estate market? And then maybe what's your, what's maybe your outlook looking forward?
Yeah, right now I think the construction and demolition side is a little bit weaker for us. That's primarily because we don't play in the temporary housing side, right? We're focused more on the permanent side of the business. We do have, obviously, temporary C&D business that we do on the industrial side, but it's not that big. When you look at the landfill volumes, they have been negative here a little bit and see that as continuing a little bit further.
Switching over to RNG, I saw you had a great press release last night with your RNG facility update. Maybe you could walk us through that and then just sort of maybe talk a little bit more about that business for you.
Absolutely. I think it's a great opportunity for us and gives us a lot of excitement over the next several years. We've been on this journey investing about $1.6 billion by the time this tranche is finished. It'll be about 20 projects that we'll have up and running, generating about 25 million MMBtu of renewable natural gas. Right now, we've had about seven projects complete through 2024. Got about eight more coming online this year, and the remaining five will come on in 2026. We'll be at the full run rate, you know, in 2027. That's going to generate $650 million of revenue at about $500 million of EBITDA, rough numbers. $26 per MMBtu is our blended average that we're using for that. That equates to about $2 a RIN and $2.50 for natural gas.
I should point out that that's a blended average across all of our sales. Part of those sales are going to go into the voluntary market, which might be a little bit lower than the $26, which means the RIN's market will be a little bit higher than $26 so that we get the full blended average of $26. Really great investment for us. Three-year payback on average without the investment tax credits. We expect about $220 million or so of investment tax credit benefit this year as well. Really strong returns, strong profile, feeds our natural gas fleet. There is a lot of appetite as potential onshoring of manufacturing. You have data centers coming on board. There is going to be a lot of energy needed. Our volume at these facilities could provide some of that needed energy.
Yeah, that's a great review of that. Maybe you could discuss some of the advantages that you have as the largest, obviously, landfill, you know, landfill owner and the scale advantage that come with that in this business.
Yeah, absolutely. Again, these projects, we've been in the landfill gas to energy business for over three decades right now. It was really capturing that naturally occurring methane and converting it into electricity for the longest time, right? Today, because of our natural gas fleet, and you know, we might talk about this a little bit later, we knew that natural gas fleets wouldn't necessarily be the be-all, end-all kind of for carbon reduction across the board. We took the opportunity to take the first step and reduce our emissions through natural gas. When the RFS came out, we saw the opportunity there to continue to fuel our fleet and generate these RIN credits. You know, we have the expertise because we've been doing this for so long. We have the balance sheet capacity to do this.
We have the strength in our operations to weather some fluctuations in commodity values. We are working on making sure that we have the appropriate level of risk built into any given year where we are going to have 80% to 90% of that volume kind of locked up in longer-term contracts. Over a three-year period, about 50% of the gas will be locked up. We can still participate in any upside that we see in the RIN's value. We are well positioned based on our landfill footprint, our expertise, our natural gas trucks. All that really leads us to why we decided to go about it the way we did.
Yeah, it's a natural fit for your company. Maybe switching to recycling, you know, your recycling plant investment, because maybe give us an update there and, you know, sort of what are you seeing in the supply and demand side of that business?
Yeah, absolutely. We went similar to our renewable energy side. We're investing about $1.4 billion in a recycling outfit for really automating our facilities. You know, we have, by the time we're done, we're going to have, you know, automated virtually all of our single-stream recycling facilities, about 26 plants that we'll have fully automated. The good thing about this, it's really not dependent upon commodity values, right? Because all of the value that we're getting from these new upgraded automation plants, or 60% of the value, I should say, is coming from reduced labor costs and reduced and improved throughput. We're also going to get some value for selling cleaner material, right? We get a premium to our normal sale of material, right? You have cleaner bales of cardboard, cleaner bales of paper, you get a premium to that.
That's really where that value is driving. The commodity price doesn't really impact that. We're well along the way on that side. As far as the rest of the investments that are coming in from new marketplaces where we're going to invest in new plants, a couple of things I'll point to examples here. Austin, Texas, for example, we didn't have a recycling facility there. As migration occurs from California to Texas or New York to Florida, where we don't have this infrastructure, we're investing in that infrastructure to meet the demands of our customers on that side. The other investment that we're making is on EPR. You know, we've won a couple of projects up in Canada and Ontario.
As extended producer responsibility comes to the U.S., you're seeing it in California, in Colorado, and primarily on the West Coast, we're well positioned to capture that volume opportunity as well. As far as what we're seeing right now, recycling comes down to two things: making sure our customers upfront understand what they should be recycling, right? We still see a lot of contamination in those loads, call it, you know, mid-teens kind of contamination there. We're also still seeing a lot of the PET bottles going into the landfill. What can we do to educate our customers to get that material through our plants, as well as the back end, you know, having that demand from the consumer packaged goods companies wanting to use that recycled content is key as well, right? It is still pretty strong there.
When you have legislation like minimum content legislation coming on board, that's going to help drive the demand on the back end. EPR, minimum content legislation, all of those things will help drive the back end. We still need to focus on the consumer upfront to make sure they recycle the right way. This is a good marketplace and it's going to enhance our leading capabilities here.
That's a good overview. Maybe talk about automation. I know Jim, a couple of years ago, you know, sort of brought up some pretty big numbers on, you're saying, with labor improvements. How is automation going to benefit you guys in the coming years on an operational basis and economics?
Yeah, that's a great point. That's what we're seeing here on the war on talent, right? You have to attract drivers. You have to retain those drivers, mechanics, things like that. What we realized is there's a lot of talent out there that we're using through third-party services, not necessarily WM employees that have high turnovers. I'm not talking 14%, 15%. I'm talking 50%, 60%, 70% turnover in some of these positions. What can we do to automate that? You know, the one area we talked a little bit about is on automation of residential rear load routes, going from rear load to automated side loaders. You can eliminate one or two helpers off the back of the truck that are contingent workforce, basically.
You improve your safety because you don't have to worry about that helper getting off the truck and getting a soft back issue because they're lifting the 75 lb can into the back of the truck. You don't have people standing on the back of the trucks where the public's out there driving around. They're about 30% more efficient. You can pick up 30% more of the quicker using an automated than you can on a rear load, right? That's one area. We have about 4,000 routes that we could convert or that are still rear load. We're about half of that, a little more than that, we'll be able to convert to the automated side, right? Things like yard waste, you're not going to be able to convert because everything has to be containerized. There'll still be some need for rear load routes.
Other things on the recycling, we talked about, we touched on the recycling investment, seeing about a 30% labor efficiency improvement in those plants by automating, right? You know, we have a plant here in Houston that we've taken investors to where before we automated, we probably had three shifts of 36 to 40 employees kind of sorting through materials. Today, I've got three shifts with 36 employees total in that plant, right? And those are hard-to-fill sorters on those lines, right? That have a contingent workforce background, right? They're not necessarily WM employees. The last area I'll talk about is kind of on the technology side is on routing and logistics, right? What can we do to improve our efficiency, right? Making sure that our drivers are following the routes appropriately, that we're able to add in on-demand services, roll-off customer calls in today.
You know, years ago, as you said, I started at 1995, 30 years ago. I remember having push pins back at dispatch. If a customer called in for a change, you had to take all the pins out and kind of reroute. Now can we do that dynamically, right? The driver goes out on the route today, there are 80 different decision points potentially that dispatcher would have to consider when they decide who is assigned that to. Let the computer do that and let the driver just know, okay, here is my first stop today. When they confirm that stop, the next stop pops up, right? No one knows really what the future stops are going to be, but it is just more efficient for us to do that. Those are some of the things that we are doing.
We've also automated some sales force and how we go to market. Call centers is the other thing that we've talked about for years of, you know, reducing the number of call centers and having customers be able to self-serve using technology.
That's a wonderful overview. Got an AI in there too. I like it.
Yes.
Stericycle, you know, obviously you guys have been in the medical waste business for a long time. You know, sort of, you know, this obviously is asset came to market. Maybe a strategic thought process, why now? Maybe just give us a review of that and then an update on how the integration is going.
Yeah, absolutely. We've been very interested in Stericycle business for a decade or so, right? And if you go back to that point in time, we were probably a $12 billion market cap company. They were an $8 billion market cap company. If we combined it, it's going to be a bet-the-company transaction. You know, when we did this deal, we were $80 billion market cap and they were $4 billion, right? So it's not a bet-the-deal transaction at this point in time, or bet-the-company transaction, I should say, at this time. Really, what drove us to finally, you know, make this acquisition is really the inflection point that this business is at, right?
They've had, you know, they've lost focus sometimes on buying companies that they shouldn't have been bought, investing in those companies, not really focused on running the business as much as possible, trying to clean up that portion of the business that really didn't make sense for them. You see them going through an ERP journey today, right? Trying to get that implemented. We've gone through our ERP journey and we know how to fix that and make sure that it's running appropriately. I think there's an opportunity set here to take what we've learned from our pricing programs and apply it to their business once we have that data. We understand the data. Once you start collecting it, we're going to be able to apply it to their business.
We think that this business really is going to have potentially a higher growth volume rate than the collection and disposal business, right? If our collection and disposal business is trading at some discounted GDP or volume, right? You know, call it 50-75 basis points of GDP, we think you could see a faster growth rate on the medical waste side as the population continues to age, right? It is really a strong inflection point here where we think we have got the opportunity to take what we know from a traditional collection and disposal business, because that is what the Stericycle business is. It is route-based, picking up medical waste and disposing of it and applying that, what we have learned. Now, different trucks, different processes have to do it, but we know how to collect and dispose of waste.
Applying that to that business is really going to be beneficial. On top of that, you know, we double our synergies from $125 million to $250 million, right? A lot of that's going to be coming from SG&A. That's going to bring their SG&A roughly to about 15%, 16% of revenue. As you know, today we're running around 9%, right? In three years from now, there's probably more opportunity to get that SG&A a little bit lower. None of these synergies contemplate cross-selling opportunities as well, right? There are additional revenue opportunities here. WM has a low single-digit percentage, probably underrepresented across the customer mix in our commercial and industrial line of business in the medical waste services field, right? Whether it's hospitals or doctors' offices, dentists, tattoo parlors, things like that, we don't service that as much as we probably should based on our size.
There is a whole opportunity there for us to provide a value proposition to those customers to show how we can offer them medical waste, solid waste, recycling, organics, whatever their needs are to become a partner with them, just like we did with the national accounts business. You see how well that's worked for us. We continue to grow that business, higher pricing, higher EBITDA on that business. We can take that, what we've learned from that business and apply it to the Stericycle business to continue to grow there. I should throw in my plug here. We haven't given anything on revenue just yet, but in June, we're going to have our Investor Day in New York City. More to come on potential opportunities from the cross-selling opportunities then.
I'll see you there for that. Maybe I'll open it up to the audience for questions. Hi, thank you. You spoke about RNG. You spoke about your automation on your routes. Can you talk about electrification with your trucks, particularly for recycling where it's defined radius and a lighter load?
Yeah, absolutely. We are testing the heavy-duty equipment to see, you know, where we can use it. That would be a market. We do have a large fleet of light-duty trucks, right? Support vehicles that we can definitely electrify. The Stericycle business is an opportunity, box trucks to electrify. From the solid waste perspective, we have not seen the full duty log necessary to service our customers. We think we would have to add a bunch of routes potentially in certain locations because of the trash side. On the recycling side, again, we are still testing it to see. Electrification is going to come and it is going to work eventually. We just want to make sure that we are thinking about it the right way. I mentioned that we have the largest natural gas fleet right now. We replace about 10% of our fleet every year.
Over a 10-year period, if we get to a point where electrification is the best opportunity, we can switch our fleet pretty quickly over that 10-year period, as well as we could, if we needed to, retrofit some of these natural gas plants and go back to electricity, right? We have, that's one of the things that I did not use as why we're doing the RNG projects the way we're doing them. We have flexibility to change kind of how we want to designate those plants if it comes around that electricity is better at that point in time. Just another benefit there.
Maybe we should just, you know, just touch on tariffs. Obviously, it's such a, you know, timely topic here. How are you guys looking at tariffs, you know, after yesterday's announcement?
Yeah, I think a lot, you could see a potential impact on capital spending, right? As that's where you'll see it first. Don't necessarily believe as a North American company we'll see a lot of tariffs impacting us. The good news is if companies see their business slow down, particularly in commercial, that's really not going to impact us as much, right? Until those customers go out of business, right? COVID is kind of a good example of that year, right? As businesses slow down a little bit, we still perform very well because you don't lose that volume, right? It's still, you just have less volume. It's better for us from a disposal perspective that you don't have, you know, you have emptier can. So I don't see necessarily a big impact on the collection side of the business from that perspective.
Good news, you could see some benefit on the recycling side, on the commodity side. As demand stays within the U.S. for recycled content, you could see commodity prices go up a little bit higher there. It is still early to tell, but I think capital spending will probably be one where you see some inflated prices and then you could see some benefit on the recycling side.
Maybe to get one more into capital allocation, could you sort of just walk through your capital allocation strategy, you know, buybacks, dividend, debt pay down, M&A?
Yeah, absolutely. In a normal year, we would say, and we've raised our dividend 25 years in a row. You know, we grew at 10% this past year. I think dividends are first and foremost. We're going to pay those first. And then what's left over, historically, what we've done is look to grow the business through either M&A activities or organic investments like our recycling renewable energy investments we've made. Then share buybacks would be last. Debt repayments in a normal year would normally not be something that we would do because our cost of debt is so cheap. Right now, because of the Stericycle transaction, our leverage ratio is a little bit higher than we want it to be. So 2.5 to 3 is kind of the range we like to be at. We expect by the end of this year to be about 3.1 times.
By early next year to be at a range in that range so that we can restart our share buybacks. It is still going to be dependent upon what the M&A market looks like and what internal investments we can make to continue to grow the business.
Well Ed, thank you so much for the time. I know everyone wants your time and appreciate you supporting us all these years and hopefully get you back next year. Thanks so much.
Appreciate it. Thank you. Have a good day.
Okay. Now we'll have him.