Good afternoon. Thank you for standing by, and welcome to the Waste Management National Services First Quarter 2021 Earnings Release. Pound key. Please be advised today's conference is being recorded. I would now like to hand the conference over to Ed Egl, Director of Investor Relations.
Sir, I give it to you.
Call. Thank you, Holly. Good morning, everyone, and thank you for joining us for our Q1 2021 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 Devina Reikin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today.
Jim will cover high level financials and provide a strategic update, Doug will cover an operating overview and Devina will cover the details of the financials.
Before quarter. Before we get
started, please note that we filed a Form 8 ks this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedules of the press release include important information. During the call, you will hear forward looking statements, which are based on current expectations, projections or opinions about future periods. All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties quarter.
Please note that our press release and our filings with the SEC, including our most recent Form 10 ks. John will discuss the results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, Joan and Devina will discuss operating EBITDA, quarter. Net income, EPS, operating margin and SG and A expense results have been adjusted to enhance comparability by quarter, excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non GAAP measures.
Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information of our use of non GAAP measures and non GAAP projections. This call is being recorded and will be available 24 hours a day, beginning approximately 1 p. M. Eastern Time today until 5 p. M.
Eastern Time on May 11. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, dial 855859205 6 and enter reservation code 1299110. Consensus of information provided during today's call, which is occurring on April 27, 2021, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebarcass of this call in any form without the quarter.
Now I'll turn the call over to Waste Management's President and CEO, Jim Fish.
Thanks, Ed, and thank you all for joining us. It was said many times last year that 2020 was a year like no other. For many reasons, it was an incredibly difficult and trying Our positive message internally was that great companies use tough times to better themselves, and that's precisely what WM did. And Q1 of 2021 showed that with an exclamation point. We had an exceptionally strong start to the year as we kept our focus on those fundamentals that have always made us great.
Our people first, then our customers and then we focus on the details of our business. And that order inevitably produces the best results. In Q1, it sure did as we achieved record operating EBITDA of $1,160,000,000 and robust cash from operations of $1,120,000,000 Typically, during our Q1 earnings call, we reaffirm our full year guidance. However, as we view these strong results, in addition to our confidence in the transformative changes we're making to our business model and the fact that we have yet to see a full recovery in our critical landfill, commercial and industrial volumes. It became clear that we're on track to outperform our guidance from only 2 months ago.
Combine this with the broader economic trends and all indicators show that our full year revenue, adjusted operating EBITDA and free cash flow are on track to meet or exceed the upper end of the guidance range News we provided in February. Devina will discuss our updated guidance, but it's safe to say we're very excited about our performance for the Q1, and we expect to show continued strength throughout the year. We're seeing tangible benefits from the investments that we've made in recycling and renewable energy. In our recycling line of business. We've developed a model for all new plants, which with the addition of
sophisticated technology, produces far
better returns through a dedicated technology produces far better returns through a higher quality of saleable material and less residual material for disposal at the end of the process, all while our basket of recycled commodity prices natural gas fleet and the gas produced at our landfills by investing in the Renewable Energy business. We're quarter. We're now seeing those investments pay healthy dividends with approximately 2 to 3 year paybacks on our 4 plans, in tandem with greater stability and higher pricing in the in the renewable energy markets. As we discussed last quarter, WM is also well positioned to leverage Environmental Sustainability to help our customers meet their own climate goals through recycling and other beneficial uses such as Renewable Energy Generation. We're in a unique position to help key stakeholders Rise to the Challenge.
And we can do this while growing our business at the same time, collaborating with our stakeholders Find new ways to create value together. Continuing to integrate environmental sustainability into our strategic business framework for long term sustainable and profitable growth requires a strong focus, which is why we've taken the step to dedicate a member of our senior team to this effort. I'm pleased to announce that Tara Hemmer, Senior Vice President of Operations, will be taking this new role as Senior Vice President, Chief Sustainability Officer, reporting directly to me effective July 1. With Tara's move, our Area Vice President leading the Greater Mid Atlantic Area, Rafa Carrasco, show will be promoted to a member of the senior leadership team as Senior Vice President of Operations. We've also launched a new exciting education benefit for our team members this month that will provide development and upscaling opportunities for our work Force.
These changes underscore how the tenants of ESG are embedded into our broader business strategy. As digital transformation sweeps across nearly every industry in the wake of the pandemic, we're making strides in differentiating our customers experience through end to end digital transformation. Today, our customers can manage their relationship with us through online through our online WM, my WM platform, which is connected operationally through our smart truck technology and supported by our customer analytics and data management tools. Our newly automated setup process streamlines customer orders and accelerates the speed at which we can deliver on our commitments while also reducing our cost to serve. These developments, combined with continued growth of our e commerce channel, give us confidence that our decision to accelerate technology investments was the right one, and we will emerge from the pandemic a stronger, more agile company.
In closing, I want to thank the entire Waste Management team for their hard work and dedication that has positioned us for a record setting 2021. WM is well positioned to benefit from the continued reopening as more states and provinces emerge from the pandemic, and we expect our commercial, Industrial and Landfill Businesses, our 3 most profitable lines of business, to benefit from further volume recovery and produce robust financial results with High incremental margins over the remainder of the year. I'll now turn the call over to John to discuss our operational results for the quarter.
Thanks, Jim, and good morning. Before reviewing the terrific operating results that we achieved in the Q1, I want to provide an update on the integration of ADS. Over the last 6 months, we've made significant progress on combining the two businesses, and we've been able to accelerate some of our integration plans. The teams have worked tirelessly to make sure This combination goes smoothly. And based on the success of the integration so far, we are increasing our synergy expectations to $150,000,000 of total annual run rate synergies, dollars 130,000,000 coming from operating cost and SG and A savings and $20,000,000 coming from capital savings.
With approximately $15,000,000 of annualized synergies captured in 2020, we expect to exit 2021 on an annual run rate synergy level of around $100,000,000 The remaining $50,000,000 is expected to be captured in 20222023 from a combination of operating costs, SG and A and Capital Expenditures. Now turning to our Q1 results. Organic revenue grew 2 point quarter as disciplined pricing and improved recycling results overcame modest volume declines. Pricing performance for the quarter was very solid with both core price of 3.4% and collection and disposal yield of 2.8%, outpacing our expectations. Notably, our commercial yield rebounded sequentially from 3.1% to 3.1% from 1.9% in the 4th quarter.
As economic reopening progressed during the Q1, collection and disposal volumes improved again sequentially to a decline of 2.3% from 2.7% in the 4th quarter. In the Q1, net new business turned positive, churn improved meaningfully to 8.2 quarter. From the Q2 2020 collection and disposal decline of 10.9%, as Jim pointed out, WMS is positioned to benefit from further improvements in North American economies. For example, at the end of the Q1, we had recovered about 72% of the commercial yards lost due to COVID, providing room for considerable improvement in commercial lines as we progress through the year. Similarly, our other highest margin businesses, industrial and landfill, have volume upside opportunity as visibility into the economic reopening continues to improve and more event work is scheduled and completed.
Looking at the lines of business, we're making improvements with the help of a very deliberate pricing focus, residential, landfill and recycling. Line. I'm happy to report that we have had standout performance in each of these areas during the quarter. Residential yield doubled year over year to 4.2% as WEMIX drives to improve the profitability in this line of business. This is the highest residential yield we've achieved since 2,008 and it showcases our success in demonstrating the value of our service and pricing in appropriate operating EBITDA margins in the residential line of business to the highest level in the past 12 months despite still elevated residential container waste.
Landfill core price was 3.2%, a strong result when you consider impact of lower volumes related both to the pandemic and severe winter weather. In Recycling, operating EBITDA doubled year over year to achieve earnings that Bank in our top 5 best quarters ever. These results are of our work to improve the business model while creating a sustainable solution for our customers and not simply the result of an increase in recycled commodity prices. While our other top recycling quarters had an average commodity price of $127 per ton. We achieved our strong first quarter results with $99 per ton.
Finally, turning to costs. 1st quarter operating expenses as a percentage of revenue improved 130 basis points to 61.1 percent, demonstrating that we are maintaining our cost discipline as volumes recover. In the Q1, we saw 40 basis point improvement in our which we were able to identify and capture as our investments in technology helped make us nimble. In closing, I want to thank the Waste Management team for the exceptional job they've quarter in managing our operations to position us for success in 2021. I'll now turn the call over to Devina to discuss our financial results in further detail.
Thanks, John, and good morning, everyone. As you've heard from both Jim and John, we had a fantastic start to 21, and we forecast continued strength in our business as local economies emerge from the pandemic. These strong results and our confidence in our outlook for the remainder of the year has led us to raise our full year financial guidance. Revenue growth is expected to be 12.5 to 13% with combined internal revenue growth from yield and volume in the collection and disposal business of 4.5% or greater. Summary.
For adjusted operating EBITDA, we now expect to generate between $4,875,000,000 and $4,975,000,000 a $100,000,000 increase at the midpoint from our prior guidance. Quarter. The improved outlook for adjusted operating EBITDA translates directly into incremental free cash flow, call. And we now expect that we will generate between $2,325,000,000 $2,425,000,000 of free cash flow of the year. Our team members on the frontline continue to deliver and the investments we are making in our people, Technology and customer experience are generating strong results.
Turning to our Q1 results. Net cash provided by operating activities grew $355,000,000 The contribution from operating EBITDA growth accounted for a quarter, a
little less than half of that
increase, with the remainder coming from lower incentive compensation payments, an increase in cash collections from customers and favorable timing of some of our payables. While we expect some of the timing differences experienced in the quarter to reverse for the year. The remaining contributors to our strong cash flow from operations results position us for a very strong year. Quarter. In the Q1, capital spending was $270,000,000 a $189,000,000 decrease in the Q1 of 2020.
Capital expenditures were lower in the quarter, primarily due to timing. Question. Both the timing of fleet purchases, which we had intentionally front loaded in 2020 and steps we took in late 2020 to accelerate some of our 2021 capital given our confidence in the pace of volume recovery. We continue to prioritize investments in the long term growth of our business, including recycling, renewable energy and technology investments that we have previously discussed. Quarter.
For the full year, we expect capital spending to be at the high end of our $1,780,000,000 to 1 $880,000,000 guidance range as we invest in our business to support growth, reduce our cost to serve and extend our environmental sustainability efforts. Putting it all together, our business quarter. We generated free cash flow of $865,000,000 in the first quarter. The operating EBITDA growth, lower quarter. Capital expenditures and favorable working capital changes that I discussed drove the significant year over year free cash flow increase.
Quarter. This sets us up very well to achieve our increased free cash flow outlook. In the Q1, we used our free cash quarter. We closed to pay $247,000,000 in dividends and allocated $250,000,000 to share repurchases. Turning to SG and A costs.
SG and A was 10.7% of revenue in the Q1. That's a 20 basis point increase over 2020. We remain focused on managing our discretionary costs, optimizing our structure for the ADS acquisition and using SG and A dollars to enhance our business. Our deliberate increased level of investment in technology as well as higher incentive compensation accruals are the driver of quarter. We are committed to ensuring we return to that optimized cost structure in the near term.
Our first quarter leverage ratio of 3.04x has improved from the 4th quarter due to our strong operating EBITDA growth. This leverage ratio remains well within the financial covenant of our revolving credit facility and right at the top of our long term targeted range of 2.5x to 3x. Our strong first quarter results call and increased expectations for current year operating EBITDA and free cash flow position us to purchase at least 1 $1,000,000,000 of our shares in 2021 and at the same time achieve our target leverage of 2.75x by the end of the year. Quarter. Our capital allocation priorities continue to be a strong balance sheet, prudent investment in the growth of our business and strong and consistent shareholder returns.
With the strength of our collection and disposal business, expectations for continued recovery and improved market backdrop for recycling, effective cost control and even better than expected integration synergies from the ADS acquisition. Cash flow conversion is strong and as a result, we expect to increase cash allocated to shareholder returns from our initial plans. In closing, it is imperative that we thank the men and women across Waste Management team for their tireless efforts to serve our customers and communities each day. Our strong results are testament to their commitment, and we're excited about what we will achieve together over the remainder of the year. With that, Holly, let's open the line for questions.
And our first question is going to come from the line of Jerry Revich, Goldman Sachs.
Yes. Hi. Good morning, everyone.
Holly?
Yes. Hi. Can you hear me?
Yes, we can hear you.
Anybody there? Okay, great. Good morning, everyone. Really nice performance out of the gate here. I'm wondering if you could talk about as you look at your employee footprint today and look towards recovery, What level of volume growth can the business absorb before we're back to adding our headcount?
Ladies and gentlemen, hold on, Jerry. I believe we're having issue with the speaker line. One moment.
Anybody hear us? Can Jeff hear us?
Okay. He's first Ladies and gentlemen, stand by. And we are back. We will now begin the question and answer session. Our first question will come from the line of Jerry Revich with Goldman Sachs.
Perfect. Thank you. Good morning. Can you hear me now? Okay, terrific.
Thank you. Sorry, I didn't mean to break the conference call on our first call together here. Question. I'm wondering if you can talk about what's the magnitude of volume growth that your footprint can absorb off of the current run rate levels. Before we're back at having to add headcount, you spoke about reducing over time in the quarter.
And as we shift forward to recovery from here. I'm wondering if you could touch on how we should think about absorption from year end capacity? Thanks.
Yes, Jerry. What I would tell you is I think if you looked at our performance throughout the kind
of COVID volume slide, if you will, Efficiencies improved throughout. Obviously, as I mentioned, our management of overtime certainly improved. And what that also did is helped us build some capacity in the
I would add one thing here too, which is about adding back labor. I mean, there's a couple of dynamics here. One is that Pretty much all U. S. Companies are facing, large or small, is this temporary competition against the government for unemployment benefits, and The good news for us is that we didn't lay people off from COVID.
So if you did and you're trying to rehire right now, you're having a tough time. And we as you may recall, We guaranteed 40 hours last year when COVID first hit and said you're not going to lose your job because of COVID in NAND. So that did help us. Not sure that we expected this unemployment benefit to continue as it has, but it did help us. I think the other aspect of this is that we recognize that labor inflation is going to be around.
It's been 5% -ish for our nonexempts for a couple of years now, but we didn't anticipate this new competitor being the government. We think that's temporary. Right now, I think it's scheduled to these unemployment benefits are scheduled to go at the end of July. They may get extended with the new package through September. But we'll use pricing from a kind of a microeconomic standpoint To make sure that we manage volume, we don't need to take all new volume coming.
We'll take the best of the new volume and we'll manage accordingly, John and his team will through the labor line by using price to maybe tamp down some of that volume if we need to.
Okay, terrific. I appreciate the color. And As we think about where volumes are tracking for the Q1, they're about 3% below 2019 level. So if that same trajectory holds in the second quarter, we should be looking at something like high single digit volume growth. Is that
consistent with what you're seeing through April? Can you just comment
on whether question. With what you're seeing through April, can you just comment on whether that 2 year stack holds and if that's what we should be thinking about cadence in the Q2.
Yes, Jerry, I think
you made great. We've looked at 2019, we looked at 2020 and really what we've done is look Q4 of 2020 to look at some of the sequential trends on volume. And that's really where I think we see a level of confidence is January, February were certainly challenging months, partly due to weather, partly due to just the comp year over year. Really happy with what we saw in March on the volume front and equally pleased with what we're seeing in April. So while we've looked at 2020, 2019, we've really focused on what the sequential improvement's been, And that's part of why you heard the message from us about how we feel about the balance of the year.
Terrific. And lastly, on the ESG side, We see some clarity for wind pricing now. Can you talk about to what extent you have the capability based on permitting to transition additional landfills to landfill gas producing landfills that tie to the grid to take advantage of where wind
quarter.
Yes. So we have as I mentioned, we have 4 plants Now we have a 5th that would be coming online in 2022. That capital is being And right now that's in the plan that Devina mentioned. We believe it's a nice opportunity for us and it's made possible because of the fact that our fleet now we are almost at 70% Our routed fleet is CNG. And considering that, that includes the ADS trucks, which are at a much lower percentage.
We think there's a couple of benefits there. One is just the simple shift from diesel to natural gas is definitely a good shift for us. And then as you mentioned, the fact that we're able to close that loop between those natural gas trucks and the gas producing our landfills. We like the investment. We started making this investment 2 or 3 years ago.
They have at current pricing. They have really good returns, and I think you'll see us continue to do that as we're doing this year, And I expect we'll continue to do it next year.
Terrific. I appreciate the discussion. Thank you.
Our next question will come from the line of Jeff Goldstein, Morgan Stanley.
Hey, good morning. Call. On the new internal revenue growth guidance of 4.5% or greater, can you just help parse out down to this figure is between yield and volume? How that compares at all to your prior thinking around the recovery in terms of that mix?
Yes. So what we're looking at is really being the catalyst for the upside on the total of 4.5% or greater. That range that outperformance to previous expectations at this point really is centered around strength in pricing and the outlook
strategies from EDS. So is that fair and should we assume that based on that your other investment assumptions for the year are largely Act or just any other cadence of expenses we should be contemplating for the
year? Yes. Quarter. Had some cost headwinds for health and welfare specifically. We also expected incentive compensation to be a headwind for the full year, though that's even greater headwinds now because of our strong outlook for 2021 than we would have initially expected.
Our overall margin guidance for 2021 initially was as much as 50 basis point improvement. You can see with the strong performance in the Q1, we expect there could be some upside to that, though Rather than update margins specifically at this point, we'd really like to see the seasonal results on volume because the contribution margin run that incremental volume is one of the important things for us to keep our eye on. That being said, I think it's really important to step back and recognize and both because of those cost headwinds and the integration of ADS. But then when we look at where we stand today, we're confident that we'll actually be at the high end of our expectations of thing that I mentioned earlier.
Great. That's helpful color. Thanks.
Our next question will come from the line of Hamzah Zimari with Jefferies.
Mario Cortellacci filling in for Hamzah. Maybe you could talk about how much room you have on the disposal pricing side. I think it's running in the high change right now as volumes are recovering. And maybe you can speak about it just in context of what you guys were executing on and what the goal was prior to COVID-nineteen and how pricing on the disposal side had started ramping prior to the pandemic.
Yes. So landfill pricing, as you know, is always a top priority for us. MSW core price was strong Several of these lines of business, specifically commercial, also as we've talked many times about recycling, have become somewhat fee based. And so as volume increases, you see fees increase and those fees go to the price line. So it's honestly part of why there's a reasons why we took the unusual step to raise guidance in Q1, but one of those is the strength that we're seeing in pricing.
And of course, a second one is that when you think about volumes, and I mentioned it in my remarks, That volumes really have not recovered fully, especially in those three high margin lines of business, commercial landfill and Industrial. John mentioned that we're starting to see really good green shoots in March and continuing into April on the volume front. And then lastly on reasons why we felt really comfortable with our guidance changes was that Recycling is, as John mentioned in his script, we're producing these great results in recycling at Average commodity prices, I mean, dollars 79 for that basket of commodities is right in the middle of our historical averages, Whereas the other four quarters, we talked about the top 5 being in the top 5 vessels all the time in recycling, and yet the other 4 were when we were up 125 dollars 127 dollars on an average commodity price. We're now down at $79 or at least that's where we were for the quarter. So to give us real confidence going forward that we can raise guidance.
But pricing and landfill pricing in particular, we think are a strength for the quarter and will continue to be in the next couple of quarters.
Great. Thank you. And then on the ADSW synergies, just thinking about what the long term revenue synergy potential is there. I mean prior to the deal, they were busy doing deals and building out their route density and that more or less question. What was put on hold as the deal was going through, and then again, we got hit by the pandemic.
Does that create more pricing opportunities for that business on top of what, I guess was already baked into what their plans were? And any thoughts on that would be great.
Yes. We look, I think ADS will go through a similar price model that WM Legacy goes through. So what we've really been focused on in terms of synergies is the cost synergies. Obviously, with respect to ADS, Just as with WM Legacy, we're looking at the cost side of the business to see what do we have to do with pricing to make sure that we keep up with inflation.
Got it. And then if I could sneak in just one more, you had mentioned weather and I don't know maybe if I I said during the prepared remarks. Are you able to help quantify what the weather impact was on volumes in the quarter?
It's really difficult to specifically point to volumes, but what we looked at is basically a month by month view of our volume trends And what we saw is significant downward pressure in the month of February, some carryover of that into or recovery event, I should say, in March. But we don't know how much was true recovery of volume lost in February versus just Continued momentum as we see economic recovery from the pandemic. We certainly think that it's the latter And we're optimistic that we'll continue to see growth based on what we are seeing in the month of April thus far.
I think it's fair to say though that it was not insignificant. I mean, when we have to shut down the entire state of Texas for a week and shut down our Gulf Coast operations, which A lot of our operations in areas like Tennessee, I mean, that was shut down for almost an entire week. So it was not It's part of why the volume story is a little clouded for the Q1 and why John gave some details on what January February looked like versus March April.
Great. Thank you so much.
And our next question will come from the line of Walter Spracklin, RBC Capital Markets.
Good morning, everyone. So I'd like to start just on obviously, you had a great quarter with from a free cash flow generation standpoint, an indication that that trend has continued. Just curious how that impacts, how you look at M and A? Does that more dry powder make you more incented to look a little harder for M and A? Obviously, your experience here with ASDW is going very well.
Or is it the case that you're kind of concentrated on the integration, You're preoccupied with that and M and A outside of any tuck ins is probably not in the cart.
Yes. I mean, it's probably more of the latter. We are still very focused on ADS integration. But look, what we're hearing internally is that there is quite a bit of interest, probably driven as much as anything by the potential for tax law changes And so I think you're seeing the pipeline start to build a little bit. We at this point are saying bottom end of the range, the historical range of $100,000,000 to $200,000,000 and that's what we said when we gave guidance back in February, And we're sticking to that right now.
It's possible though, it's always possible that something comes along that's too good to pass up. And I think what you'll probably see is that, you may see that valuations actually, it's really just a math equation. You may see valuations come down a little bit because somebody is looking and saying, all right, my capital gain here is going to be pretty significant and here's what the cost That is at the higher capital gains rates. So, I'm willing to come down a little bit in terms of my sales price. Don't know for a fact that that's what happens, but it wouldn't surprise me if that happens.
But for us right now, Walter, we're really focused on ADS integration and we're sticking with The bottom end of that range at $100,000,000 That
makes sense. Okay. And my second question here is on coming back to your contracts and how might the pandemic has given you an opportunity to get better yield without raising Your core price and here I'm referencing to structurally charging more or charging on a weight basis as opposed to a per household. Is there anything that you're looking at now that is allowing you to make a greater return On your contracts with your customers, commercial, residential or otherwise, that goes beyond just simply higher price.
Well, there really are a couple of dynamics taking place with price. If you set aside recycling and just talk about commercial, industrial and resi. If we talk about really commercial, call. I mentioned earlier that we're moving some of that to fee base. And so that is a component of price, And it's an important component of price, and we think that that's going to help and has helped and will continue to help commercial and industrial.
And then on residential, John has talked about residential now for 2 or 3 years. And we really look at residential as being one of the real strong points for the quarter. The work that his team John and his team have done To get to the highest yield since 2008, a 4% yield has really been a success story for the company. And that's coming as much as anything through maybe not as much with fee base As it's coming through contract renegotiation, it might surprise you to know that that's not coming from some of the indexes going up. We actually saw A small amount of deterioration in that for the quarter.
Now we do expect that inflation will kick up a little bit and so we'll get some help. And we're typically a beneficiary of higher inflation, but we didn't benefit in Q1 from that. It was really all a Almost all of it was just renegotiation of contracts and factoring in to those contracts, The fact that we now expect weights to be a bit higher permanently because of the pandemic and because of somewhat of a permanent shift of some portion of the economy to a work from home environment. But this was really all and then by the way, there's also this ongoing move to a different index that's more reflective of our cost structure, which is a water, sewer, trash index away from a CPI index. And we're up to About 40% of our overall business is index driven and about 40% of that is now on a water sewer trash, which then equates to about 15% or 16% in total.
That's great color. I appreciate the time and congrats on a good quarter.
Thank you. Thank you.
And our next question is going to come from the line of Tyler Brown with Raymond James. Good
morning, Tyler. Hey, okay.
Hey, Jim, so back at our conference, You talked about some pretty stark differences in the small container volumes in reopened versus non reopened markets. And I realize you may not have all the data right there at your fingertips, but can you just give us some flavor of how say like a Texas or Florida small container track versus call it Ontario, Canada, just maybe something like that. I'm just curious to get a little more color there.
Right. So Tyler, the you're right. We talked about some of those states that were early in reopening like Texas, Florida, Arizona, Tennessee and how they were showing real nice signs of recovery, but how other states maybe not is a good example. We're seeing some reopening in California. We're seeing some reopening in New England.
We're seeing some reopening in the upper Midwest and Illinois. I would say that right now, Tyler, the area that is still showing the greatest softness that has not come to the party yet is Canada, and it's mostly Eastern Canada. That I looked at the numbers this morning, in We're still showing a little bit of softness also in New York, in Michigan, but the number of areas that are in that latter group, the softer group is shrinking, and that's good news. And so I think I would add a couple then to the list that I gave you at your conference to just the Texas and Florida. We've got a few new entrants there that are helping.
Okay, okay. That's helpful.
But those Texas and Florida, are they tracking up In small container?
Yes. I looked at Florida's number yesterday and Florida looks great. I would tell you the only challenge there is on the labor side. It's that competing against somebody sitting on a couch. And So, while we didn't have layoffs as a result of COVID, as the business grows, we have a need to add drivers, add technicians.
We have a number of open recs there and I'm not going to tell you it's been easy to fill those, but We do think that's temporary. We don't think those that we're competing against the government forever. We think It's probably Q3 when the government starts to realize that, that ultimately needs to go away, that there's enough jobs out there to fill without providing the added unemployment benefit. But yes, Florida is doing real well right now. A lot of that hospitality is coming back start.
In Florida, and I would say the same in Arizona, the same really in Texas too.
Okay, that's helpful. And then, Devina, So if I took the midpoint of the EBITDA guidance, I think the raise was about $100,000,000 So fiscal year. Yes. Okay. So I'm curious how that breaks down.
So it sounds like there's maybe 20 of additional ADS synergies, but then it sounds like there's a little bit of actually a drag on incentive comp. But basically of the remaining, How much of that is simply commodities and how much of that is improving IRG?
Yes, it's a great question, Tyler. I think the way that we're thinking about it and you highlighted ADS, we're thinking about ADS as being an important component to the overall collection and disposal business. And the collection and disposal business with ADS synergy capture is over half question. The expected $100,000,000 lift in EBITDA with a lot of that coming from expectations for stronger pricing, expectations for strong half discipline and then there's a big offset for the incentive compensation that we discussed. So when you have about half of that related to strong solid waste.
It's a really strong indication of the strength of those two indicators. Then on On the commodity side, we've got a combination of the recycling line of business and RINs. And on the recycling commodity piece, We have about $35,000,000 there and about $20,000,000 from RIN value.
Okay. So collection and disposal off, it gets completely offset by incentive comp and then commodities is kind of the other piece, if I'm
Yes, not completely offset by incentive comp. It just takes away from the headline number for solid waste.
Okay. Okay. And then just I know there's been a lot of change with the fee for service change in resi. So what is a $10 sensitivity to a $10 move in the commodity basket, either in terms of EPS or EBITDA these days.
Yes, Tyler. On the recycling, I'm assuming I presume I answered what you meant. So yes, I mean you saw you heard some of that in my prepared comments about an average rate in Q1 79 versus historical high averages in the mid- to high 120s. And as I also mentioned, we've doubled the EBITDA quarter over quarter for the year. So we're very happy there.
To answer your question specifically, I would say it's about 23% to 25% of that move or $23,000,000 on ten It doesn't slide up and down the same way as it used to because, again, we've put floors in place from an inbound customer standpoint. We've got better and secured outlets on the outbound side. I mean, we're seeing strong domestic and export markets right now, which is really helping us on the outbound pricing side, and we've got More security around some of those rates. So the math I gave you is right. At a point in time, if commodity price went way far South, which we don't expect.
We expect them to stay hanging there for the next handful of years. That math would change. But about $23,000,000
for that ten dollar
move is where we're at
for Q1. So $0.08 per share then, Tyler. It's about within this band that John just described, this price band. It is about $0.04 for a $10 move.
Okay. Yes, that's what I'm looking for. Okay, thank you so much.
And our next question will come from the line of Michael Hoffman with Stifel.
Hey, Jim. Thank you for everybody, Jim, Devina, John, Ed for taking questions. So can I tease out Devina a little bit more off of Tyler's question? If we've got greater than 50% is benefited by the collection and disposal, so that's $55,000,000 And then there's $55,000,000 from recycling and RINs. Is the compensation number then just $10,000,000 I I just want to get this right.
Yes, the compensation impact right now our estimate and can change based on our performance. The compensation estimate is a total of about $25,000,000 And so when you look at the solid waste piece. My comment was it's more than 50%. So we take the $55,000,000 from commodity, the $25,000,000 off Set from incentive compensation that gets you to $30,000,000 So you've got about $70,000,000 at solid waste And it's a combination of synergy capture from the ADS business and the strong performance from legacy WM.
Right. And that was the important part of So on the WMPs, that's about asset utilization, incremental price because you lowered your churn, Improved your core. That's the it's a little bit of all those things sum up together, right? So for that incremental That's exactly right. Right.
Okay. And then John, there was a question earlier about labor. I mean, one of the things to caution everybody You may make a decision to walk over time up not to add capital, drive more trucks at a higher rate and then add a truck at a high level of utilization instead of adding a truck at a lower yield level utilization. We have to be careful when we look at the balancing Some of those numbers, is that over time, is that correct?
Yes, that's fair, Michael. I think what we've also learned through this is that as the volume really kind of
the tide went out on I think the team did really a good job from an asset utilization standpoint. And what we've learned is that we can some efficiency gains to be made by shortening the work week, if you will, from 5 or 6 days to 4 or 5 days. And we worked pretty hard through the pandemic to make sure we flex down. And I think that's what you see in Our efficiency numbers, our asset utilization numbers, our labor numbers. And then as we flex back up to your point, I mean, there's going to reach a point where we theoretically have to add another Truck.
But to my earlier comments, because we created that capacity, we feel we've got some leverage certainly throughout this year to be able to take on those additional volumes without real big incremental costs.
Right. And it's things like let's not work half a day on Saturday, which is overtime, you can get the work all done in 5 days Kind of thing.
That's the stuff you've kept.
Yes. You've kept. Okay.
And then at
the end of last year or in Q4, you gave us a number of The total number of customers that weren't open yet at the end of the calendar year, where does that number stand today?
Is this the recovery of commercial collection that we talked about being at about 70% of the COVID losses. Is that what you're referring to, Michael?
So I and the distinction being a customer because if they could restart but have less volume. So I Full or partially full. I don't care. The revenue came back on. So I'm trying to so when you say the 72%, is it 72% of the not Open physically or the tonnage?
It's Michael. I've said, we referenced that 72% number, that's of yards lost and then yards recovered. So it's units.
Right. Okay. But you still have a lot
of customers Mike, we do think that Go ahead. Mike, we do think that there's a percentage of businesses that's and we don't know what that is at this point, but there's a percentage of businesses that are going to be much longer in reopening. And so because this was such a unique event that we had never seen before. We don't know exactly how that reopening occurs, but We do know that there are sub businesses and likely and to Tyler's question, likely in those states that were that took longer to reopen. I mean, Texas reopened at least partially on 17th May last year and then fully reopened later in the year in Q3.
But some of the states stayed closed Until 2021.
And if you were a
small business in Texas or in Florida or in Arizona, you probably were able to weather storm. If you were a small business in Michigan or in Toronto, you may still be having a tough Time Weathering the Storm. So we don't know exactly what that how many of those customers actually just simply don't come back. There will be some amount there for sure, but we are, by the way, looking a bit at I know a lot of industries are comparing to 2019. And because comparisons are going to start to get really quirky, they already are.
I mean comparing to 2020 For any metric is difficult. I'll give you one number that's very encouraging for us and that's the EBITDA number. It's part of why we were so excited about the quarter end about actually raising guidance. When you look at 2019 EBITDA for WM Legacy and you add it to kind of ADS legacy, You get something in the neighborhood of kind of $4,850,000,000 and Then you look at what we just adjusted to and it's $100,000,000 above that. Keep in mind, That's not really fair to do that because we divested a bunch of ADS legacy.
So but even if you
don't count that, if
you just say WM Legacy 2019 and ADS legacy 2019, you're talking $4,850,000,000 and we're $100,000,000 above that and we have not gotten a lot of the volume back And we still have a lot of room to go in terms of ADS. So that's one of the many reasons why we were very encouraged with the quarter and very able to take that unusual step to raise guidance.
All right. And that helps a lot. And Follow your thought all the way through, you sold $100,000,000 of EBITDA approximately. So you're really up net at 200,000,000 on the combination of the 2 companies and you still have room to go.
Yes, we did have to sell some, that's for sure.
Yes, okay. John, you mentioned service Intervals improved. So just to be clear, are you seeing this is a COVID customer restarting and then the interval improved or existing Business on the interval improved or a combination of all that?
I think it's a combination, Michael. A couple of numbers. I mean service increases, pacing decreases. That's been the case for a while, but it's the gap's actually widening. So you can argue about what that points to.
But Overall, we've seen a good trend there. And the churn number, we always talked about what was structural. Out of that churn quarter. We were at 8.2% for the quarter, down from 9% and change. So we view that obviously as a good indicator.
And then to my points earlier, Michael, about Time in particular on commercial. It's hard to look at the January excuse me, the Q1 this year versus last year. And but sequentially, when you look at Q4 and then I pan across January, February, certainly not strong months, partly weather, partly all the other stuff we've mentioned. But then I look at March and what trends are in April on small containers and we're certainly encouraged there as well.
All right. And then last one for me and this
is a little bit of a
non psych quarter. I think the garbage industry has one of the greatest opportunities to influence scope 3 admissions, which are it's downstream question from you, it's your vendors, your suppliers. So on Terra's remit, what is the opportunity there? Because I think your business model forces those suppliers and vendors to have to sort of change the way they do things to meet your needs.
No, Let me give you an example of, Porter, you're right on that one. It's golf tournaments. We have made the golf tournament 0 waste now for 9 I think 9 consecutive years, maybe 10 consecutive years. And so we take a very influence we play a very influential role there with the vendors or with the fans coming in. And while it's not going to be identical to that, We certainly, to your point, can play an influential role in sustainability, and that's why we look at it as such a differentiator for us.
It's why we felt that strongly about putting a senior level person in charge of it. But I think you're absolutely right about that, Michael.
All right. Well, nice job. Thanks for doing something very unusual. I 33 years, I can't remember the last time somebody raised guidance on the Q1.
Thanks, Mike.
And our next question will come from the line of Sean Eastman, KeyBanc Capital Markets.
Hi, guys. Strong start to the year. Congrats. Devina, you mentioned in the Q and A sort of not explicitly Updating the margin guidance, you're sort of still keeping your eye on that contribution margin into the 2nd quarter volume recovery. I mean, what are the big puts and takes that you're really keeping your eye on there?
And is it fair to say that you are feeling better about that dynamic now with the Q1 closed out strongly?
So yes, it's a great question. And I think we talked a great deal today about the biggest driver and that's the labor cost part of the equation. We certainly think that The efforts that have been put forth by the team to manage overtime hours and get those impacts not just on the service side, but extended through on the repair and maintenance side have been of tremendous value. We want that to continue to be a lever The break points in the equation that happen when you add an additional route. And so that's what we're watching as we move forward from here with the growing volume IRONMAN.
Aside from labor, I think what's really important is that we can't forget that in our transfer and disposal costs and subcontractor There's a lot of third party labor costs built into those numbers as well. And so the theme that Jim has pointed us to a number continue into 2021. So 45% contribution margin is what we've talked about. We're encouraged that we think that
Okay. That's really helpful. And then I guess a more broad question. The cash flow generation term performance measure in the stock incentive plan seems to imply you guys are going to have over $4,000,000,000 of deployable free cash flow in a sense over the next 3 years. I mean, I think we have a good sense of Capital Deployment Priorities for 2021 as you integrate ADSW.
But there's a lot of dollars there and thing as you look out over that 3 year horizon with all that capital.
Yes. So The first priority is investing in the long term growth of the business, and that's something that we talk a great deal about. Organic growth Through focuses in recycling and renewable energy have been places that we said you could see some outpaced capital spending from us. So the current guide for quarter. Our expectations for the full year in those programs.
We just have yet to determine how much we could accelerate spend in 20222023 to cover incremental investment that could be worthwhile in those spaces. Question. I think the rest of the allocation really comes down to shareholder returns continuing to grow the dividend over the long term in that 45% to 50% range on a payout ratio basis and we measure that on free cash flow. So there's direct conversion from that free cash flow measure and the long term incentive plan toward the dividend, which I think is a really strong indicator of how we think out the expected growth that can happen as we revisit that in the Q4. Beyond that, the statement that we made about at least $1,000,000,000 of share buyback in 20 21 as an indication that when we don't see M and A being the place that we will spend that available dollar free cash flow, there is tremendous flexibility to allocate incremental dollars to the shareholders through share buyback.
M and A, Jim touched on that. To our other opportunities. We'll be well positioned to do that with a strong balance sheet that I mentioned.
Okay, terrific. Thanks for the help team.
Thank you. And Our next question is going to come from the line of Kevin Chiang with CIBC.
Hi, good morning. Thanks for question. Congrats on a strong start to the year. I'm just wondering, as the economy opens, I think during the pandemic, Just given all the government support for small businesses, I think that did cloud some of the analysis in terms of what bad quarter. Look like as companies came out of this and I guess as parts of your business have come almost full circle I guess and some of this government support is being removed.
Is anything playing out that was unexpected in terms of how you accrued for some of these bad debts? Or are things coming better or worse or maybe as expected?
I would say that things are recovering as expected. From a cash flow perspective, The really strong result that we had in the current year has to do with the headwinds that we experienced in the Q1 of 2020. In the Q1 of 2020, we were between $60,000,000 $80,000,000 behind on cash flow because we saw our customers slow down on their payments. We've seen really strong resilience from our customers and I think our proactive steps to protect our customers, particularly small business through the pandemic, have paid dividends in that regard. And so I will say we had expectations, but all in all, I would say more close to tracking than leading.
Okay. That's great news there. Call. And then maybe just on the opportunities around the landfill gas capture. I know you spoke to this in your prepared remarks, but it does feel like there's more private capital flowing to this opportunity.
Like I've seen, for example, a number of investment announcements around companies looking Object, only conversely, has been the ROIC improving just as a lot of other end markets look to reduce their own carbon intensity and look to landfill gas capture as maybe Helping them achieve their own goals.
Yes, Kevin, on a third party front, I'm sure there's plenty dollars out there that are looking for a place to park when in this space. But I think what's important is that the ones the 4 or 5 plants we have either in operation or that we've invested in are showing some really strong results and we're going to continue to look at those opportunities. I think Devina said, How we finance it is a different question. We have the balance sheet to be able to do that. We've got a fleet of 130 or so plants, a handful of those are the RNG plants.
As Jim mentioned, we're closing the loop and fueling over half our fleet with renewable natural gas, which I think long term. That is a great solution for us, and we've clearly got some runway to go before we even consume all of our capabilities to fuel fuel our own fleet. We're happy with the space and the investments we have for sure.
That makes sense. And thank you for taking my questions. Congrats on a good quarter again. Thank
you. And
our question will come from the line of Noah Kaye with Oppenheimer.
Good morning, everyone. Thank you. John, Just looking at the $50,000,000 of upsized ADS synergies targeted here, Can you give us maybe the 2 or 3 big factors that are really driving that? Where are you getting greater savings than previously targeted? I think this will help investors understand what substantively you're actually doing here to improve the returns.
Well, certainly, you've heard us talk in the last few quarters, the integration has kicked off and gone has gone well. A lot of the elements of the integration risk seem to be going better than expected. We talk about data migration being kind of the long pole, last long pole in That's coming along nicely as we're moving that information over to our system. That's important, Noah, because in order to get the routing synergy or route We need to have all the information in one database. But specifically to your question, I mean, a public, public deal, we didn't you don't get the create the business more efficiently than we even thought going into it.
Secondly, I think on internalization and transportation synergies is Really, on the supply chain side, even though we're facing a couple of headwinds on some commodity related pieces, our supply chain group, once they got to look that the whole portfolio of spend there has also been able to drive some additional benefits. So it's really efficiency in the business in the field. It's the internalization and transportation and disposal internalization. And then lastly, it's really some of the corporate synergies around supply Those are the 3 big buckets.
Okay. That's super helpful, John. And then I guess a question for Jim and the team broadly.
Call. I'm just curious to
know how you're engaging so far with the new administration Some of the priorities they focused on in terms of climate pledges that includes taking a whole of government approach That includes EPA. Also, it's clear that waste reduction is, for some parts of the government, a focus as well. So just can you talk about some of the engagement that you've had so far and some of the focus areas for you as we kind of Getting almost what quarter
of the way through the year of this first administration.
Well, so you mentioned EPA and that's where our engagement has been largely. We've been engaged with them for not quarter that the new administration has been in office, but for quite some time before that. But because of that engagement of them. We do know that there are changes coming through the EPA down the pike and we're prepared for those. And I think We've mentioned this before in an all sort of way, we believe we end up being a beneficiary of some of these changes coming from EPA, we always held ourselves to a much higher standard environmentally.
So to the extent that the bar gets raised by the new administration. It actually ends up being a benefit to us. The other areas, Venus talked about the potential for tax changes and things like that. And so we're keeping up on that. I personally I have not had no any engagement with the new administration, nor did I have engagement with the last administration.
I guess they don't value our opinion that much, but that's okay. We're happy to fly under the radar.
All right. Appreciate it. Thanks, Jim.
And our next question will come from the line of Jeff Silber with BMO Capital Markets.
Thanks so much. I know it's late. I'll just ask one actually follow-up from the last one. The President has proposed a pretty aggressive infrastructure program. I know there's some people thinking that may not all the spending be infrastructure related.
But I'm just curious from what you've seen so far, Do you think there'll be any benefits to your company from if any of these things come to fruition?
Look, I think an infrastructure bill is going to be a positive for us any way you slice it. But there is a question about what the details of that bill are. I don't think anybody knows at this point. And there Still there's a lot of, gnashing and teeth that's going to need to take place within in Congress to figure out Those details. So there could be an infrastructure bill that ends up being even better for us, depending on the details of it.
But any infrastructure bill is, I think, good for the economy and ultimately good for us.
Can you give some examples of what those details might be that could benefit
Well, so an infrastructure bill, for example, that focuses on road construction Or bridges or big projects like that. That is we would certainly be a beneficiary of that. An infrastructure bill that focuses on a reduction in natural disasters, That's a much, much longer term benefit. So I don't know that that's I don't know that Infrastructure spending that then in turn turns into fewer hurricanes, is going to benefit us. That's going to be harder to see, I'll put it that way.
But certainly infrastructure bill, as we think about airports, as we think about roads and bridges, all of that, we end up being beneficiary on the collection side of our business and the disposal side.
All right. Thanks so much.
Question will come from the line of David Manthey with Baird.
Thank you for fitting me in. One last cut here at the guidance walk, if I could. So you're saying the EBITDA guidance is up by about 100,000,000 And I believe you're saying that the compensation expense would offset pretty much the ABS synergies. So If we just set those things on the side, if your revenue midpoint by 266, EBITDA is up by 100, that looks like a high 30s kind of contribution margin. What I'm asking here is it seems like if you're saying most of the revenue up coming from yield Commodities and Growth in Higher Segments.
Are you introducing a factor of, privatism here or is there another element we're missing?
What I mentioned earlier about headwinds that we know are coming, quarter. They were particularly strong in the 2nd quarter 2021 outlook. And so our expectation is currently that we could outperform on the margin side relative to where we sit today. But to build it in before we've seen the volume question we thought would be, not necessarily prudent based on where we stand and we knew that 100 segment. And EBITDA from just 2 months ago was a very strong indication of the strength of the overall business.
So is there Potentially, but it would have to come from how we see the cost of the equation flow through as we return.
I think we're always you're always going to see this company, this management team and really even the Be somewhat conservative. We're a fairly conservative company and industry. So to your conservatism, I mean, I would say you're always going to see us be fairly conservative, which is why to the people, it was such a unique to raise guidance after just 1 quarter. Every time that I can remember and I'm just about to hit my 20th year with the company, We've had a Q1, even a Q1 where we've just reaffirmed guidance. I think we did have 1 quarter where we lower quarter after 1 quarter, but this is unique for us to raise guidance.
But with that said, we're always thoughtful about it and there is a level of conservatism in everything we do.
I appreciate it. Thank you.
Question today is going to come from the line of Michael Feininger with Bank of America Merrill Lynch.
Okay, guys. Thanks for squeezing me at the very end. I'll just keep it very short. I mean, obviously, You guys are talking about the focus on the price. We saw the improvement in churn.
I'm just I'm wondering, Jim, as you see things open up and volumes do come up, it Seems like maybe this reopening is getting pushed out a little bit based on the commentary in sort of April May, maybe it's getting pushed doubt. But when you do see the opening, are you going to see some small players that have kind of been struggling? Are they going to try to grab that volume? Do you have to walk away from some areas where you think it might get a little too competitive on that volume and focus on the higher margin areas. I'm curious how you're seeing that kind of play out when this reopening really does pick up more steam.
Thank you.
Yes, Michael, maybe a little bit. I mean, honestly, if you look at I talked about the improvement we made in the residential line of business. And we have walked away from some contracts there. And so I think you'll see some of that. I think you will always see us look at volume with look at it pretty carefully because Not all volume is created equal.
And so as we think about this, as I said earlier, there may be some volume that we just simply elect not to take. And that might help us not only in terms of margin and in terms of operating performance, but it might also help our operations teams as they look at having to hire to accommodate that volume.
Yes. Are you seeing that, Jim, in some of the places that have reopened, maybe some of those mom and pops that have been struggling much more than you guys? Are they Starting to get a little competitive there as we're going to see some of these regions and states open back up?
Look, I don't It's a competitive industry. So there are always going to be there's no shortage of competition in our space. And I honestly, just anecdotally, I didn't see a whole lot of small businesses go away in our at least in our industry. So I don't necessarily think you're going to see a whole lot come back because those that were there pre pandemic are still there. And it's a competitive space no matter who is competing.
So I think we do a nice job of The beauty for us is I think we're doing a really nice job of differentiating ourselves. So it's not just based on price, it's based on a service offering, it's based on this customer service digitalization that we've talked about. And that ultimately is what we look to differentiate ourselves and give us the ability to raise price so that we're not just staring at a commodity competition.
And Devina, just so we're clear, because I might have missed this, Like obviously April May are the comps with the year over year with what happened last year. Like how are we thinking about this volume, The 2% volume number with the second half and Q2, have you guys I might have missed this, have you framed any ranges of how to think about That easy comp in the second quarter and then really how that plays out?
Yes. It's a great question, Michael. Those and then closer to the 1.5% to 2% in the back half of the year.
Okay, perfect. Thank you. Appreciate that everyone. Thank you.
Thank you. That will conclude the Q and A session of today's call. I'd now like to turn the call over to President and CEO, Jim Fish.
Thanks, Holly. Just a quick ending comment. I just want to reiterate how much we appreciate. We now have 50,000 almost 51,000 folks here that have made a huge contribution to the success of this quarter and continue to do so day in and day out. So thanks to all of you for your contribution and thanks to everyone on the call for joining us today.
Thank you for participating in today's Waste Management Conference Call. This call will be available for replay beginning at 2 p. M. Eastern today through midnight on May 11, 2021. The conference ID number for the replay is 1299110.
Again, the conference ID for the replay is 1299110. The number to replay is 855-859 2056 or 404-537-3406. Thank you. You may now disconnect.