Coming to the stage is WM, Waste Management, WM, Devina Rankin.
Hi, how are you?
Chief Financial Officer, John Morris, Chief Operating Officer. Thank you both for being here and helping close out our day, so did the last panel make you nervous?
No, we've got a great team that's all over it.
Okay, it's good to hear.
Very secure.
Okay, so I'd like to talk about the strategic allocation of capital. Because I think you all have been doing some interesting things that are well known in the context of your RNG and your sustainability investments and MRF upgrades. And I think of those things as you're probably always going to do them. And there was a question of speed and degree. They have changed. But as you sit here today, because that money's committed, you've told us about it. You've told us what the return is from it, but everybody has started to figure out how to measure it.
What's next? And what's the process behind the deployment of that next incremental dollar strategically? And this is, I'm starting on the base. You've got a certain amount of money you've got to spend on the garbage business to replace the trucks, the containers, the cell development, blah, blah. This is that next dollar beyond that.
I want to start with a couple of things. One being that WM has always been an intentional and responsible steward of capital. Return on invested capital is one of the things that we certainly have been focused on the last decade as a leadership team. When we look at the renewable natural gas business and the recycling business, we're looking at two of the highest return on invested capital opportunities that really are available across the entire portfolio.
Yeah, I wanted to jump up when the Google person said that the recycling business is a money loser because I was like, no, it isn't.
No, it's yeah, we have definitely found a way to make money consistently in the recycling business, and that fee for service model has been huge, but the technology investment has also been exceptionally important, and when I think about where we are, the renewable natural gas and recycling investments are one thing, but also investing over $7 billion to acquire Stericycle and really make an intentional push on the health care segment of the U.S. economy, which is certainly something that we were underrepresented in historically. It's an indication that we are being very intentional about using the company's capital, but when I say that $7 billion number, it sounds huge, and it is a big investment, but then you step back from it and say that WM over the next three years is projecting that we'll generate approaching $10 million in free cash flow.
And that's after we've made every investment in the sustainability business, every investment in truck capital and facility purchases. And so this business is a perpetual cash flow generator. And the strength of that means that there's more runway to go from here. What we prioritize is, again, achieving that return on investment. But it's also scale. It's customer focused. It's technology led. It's ensuring that we're being mindful about not just who we are today, but who we need to be 10 years from now. And what comes next, I think, is about building upon our capabilities and our service to the customer.
So when I think about, there's a $110 billion garbage business. There's $4 billion medical waste. There's about a $40 billion industrial hazardous. There's probably a 20, mid-20 C&D kind of opportunity that fits the companies that are in this room. There's a huge aggregate C&D thing that's totally separate. So garbage is the tallest pole in the tent. And now the rest of this is that thinking about those incremental investments. So Stericycle is a good one. It's a big number. But you, as a percentage of the health care marketplace, were underexposed, if I remember correctly. Like meaningfully underexposed. Not a little bit, but a lot.
That's right.
One of the advantages, Michael, we've been talking about with Stericycle, and we're very much in the early innings, as everybody who's listening to any of the calls knows, is when you talk about being underrepresented and you look at what we had in the medical waste space from a solid waste perspective, there's a ton of opportunity. You've heard us talk about cross-selling and what the benefits will be of us doing that. So when you look at our customer base and the health care customer base and the amount of overlap, it's.
You were not picking up that much trash from the medical.
No, I'm saying that no, we weren't in the medical waste business, but even the solid waste aspect of all these big health care facilities.
Yeah, no, that's what I mean. You were not picking up that much solid waste at health care facilities.
Correct, we were underrepresented there. So we see that as a cross-selling opportunity as time goes on. But as Devina has mentioned, you've heard us talk on the call. Right now, it's get the business stabilized, ERP systems fixed, and iron some of those out. But I think whether it's the cross-selling or even a lot of the technology we've talked about from a routing and logistics perspective, it's not the same business, but it is a network-based business with people driving vehicles serving customers and containerized material. So as time goes on, we also see some benefits that will come out of that.
There's a lot of similarities around the logistics and that become cross-purpose. But start with, I mean, they had $200 million of revenues, which was a bundled revenue in the U.S., of which a big chunk of that was solid waste. And then there was medical waste and health care hazardous waste and sharps. I would think, and there's 60% of the market in medical waste in hospitals. I would think there's this huge opportunity to go back into that medical waste customer and cross-sell them.
Absolutely. So for context purposes, not missing anything at all. For context purposes, we are low single digits in terms of representation in the health care industry for solid waste services. And when you think about WM more broadly across the segments of the U.S. economy, our representation is generally meaningfully higher than that.
Yeah, you're in the 20s.
Yes, and so there's meaningful upside for cross-sell there, and what we've learned so far in the customer engagement is that WM's differentiated brand with regard to sustainability and the movement that we've made with large national account customers, in particular with data, is something that those customers are really hungry for, and so there's an appetite to move quickly in terms of how we can better service the whole experience of those customers.
Okay, so having a conversation with Rafa tomorrow at 11:00 A.M., and I really want to talk to him about the Stericycle business, but he is SVP of strategy. So the whiteboard's in his office. But I'm curious about that whiteboard in the sense of what's the art of the possible for waste management at WM? And without giving out your state secret, but what is the things you're thinking about that should be on a whiteboard that speak to, okay, should we or shouldn't we put capital to work?
So I'll go first and then John can add in. When I think about it, it really starts with the customer and sustainability. Those two things are.
How are you defining sustainability in that context?
Sustainability is advancing environmental protection and service across today, mostly the North American landscape, and doing that more purposely and holistically, and I was in here earlier to hear Republic talk about the Polymer Centers as an example. One of the things that we have done very intentionally is focus on building out we had the largest single stream recycling facility network in North America, but we have scaled that meaningfully, and we've done that both by increasing capacity in existing markets and adding capacity to underserved markets, and so if you look at the amount of recycled content that we're managing today across our network, we're only at 15 million tons, and if you think about the context of what's available, we take 122 million tons into our landfills each year, or in 2024 for context.
And so I think it talks about the art of the possible is addressing whether or not that 122 million tons can be maximized from a value creation perspective for environmental and economic value.
Just to be clear, the 122 includes C&D and special waste. Maybe it's 80 MSW, but that's still a big number.
It's a big number.
With big number. MSW would have everything in it potentially, other than the possible fraction you pulled out. I'm saying this, you can tell it's been a long day and I haven't done this in a while. We capture about 30% of PET, 30% of HDPE. It's in our early days on polypropylene, but we'll get there. We're probably in the 40s on metal cans. So where's the other piece? Well, some of it, sadly, is in the trash disposed. Some of it's in litter still, or better. Then others are in public settings. So I guess the interesting question is there an opportunity to get it out of the trash? It's not just are we adding because 75% of the population has access to curbside recycling.
But only 29% of small and medium business is currently recycling.
And how much do you think is there of that recoverable material that's not fiber? Because everybody wants to focus on plastic for a minute. So let's focus on plastic.
Yeah, I mean, what I would tell you is that I'm the daughter of someone who was a small business owner. And I know that she, my mom, was creating similar amounts of recycled content at her place of business as we did in our home. We've advanced substantially since I was a little girl what we're doing in the home to sort out our recyclables and take care of them. We've not done that in small and medium businesses the same way. And what is that opportunity?
Essentially, it's that we have a lot of these and they get thrown in the trash, basically.
She had a lot of TAB and Diet Coke cans too.
Okay, well, that's the aluminum.
The other thing I would say, Michael, when we talk about sustainability, it's a broad topic. It's got to be environmentally sustainable. It's got to be economically sustainable.
It's got to be scalable.
It has to be scalable.
Yeah.
There's a lot of these technologies and efforts that have checked one or two of these boxes, but it's been challenging to get all three checked. I think that's the filter we're going to continue to push these through. Because over the long term, if it's not financially sustainable, then it's not going to be a good investment for us over the long term.
Where do you come out on what do you think is in that small business from a recoverable material? If it's 70% PET, we're doing a really good job getting 30% captured in the residential infrastructure. What portion of that 70% do you think is in that small business?
I don't know the answer to that question, but I think when we think about the art of the possible, it's about having that on the whiteboard and working to solve for it. Because we know it's a substantial part of it. We talk about small and medium business being the backbone of the U.S. economy. And that means that a lot of production's happening there, but production also generates waste. And so it's about managing that as responsibly as we can.
The other thing I'd add, Michael, is you talk about the traditional recycling streams, PET, HDPE.
The biggest fraction of that's in MSW is the organic fraction.
Organics, but that's mostly in the home.
Yeah, it is. But I mean, there's a commercial application there as well. And we all know that it's arguably 35%, 40% of the waste stream is some form of an organic fraction. How do you liberate that material, get it out, and convert it into something that can be used otherwise?
We had somebody on the panel earlier, Mill, as an example of that.
Oh, I wasn't in here, sorry. But I think that's another interesting part of the waste stream that I don't think we've figured out yet. But I think over the long term, when you talk about the 80 million tons, I assume that number is relatively close. A big fraction of that is this organic piece.
In my office, that whiteboard has organics, and coming back to the services side, saying you need to own the solution to the organics as opposed to having it dictated to you. Because probably the dictate to you is going to be something that logistically you're going, that doesn't make sense.
If I could, I'm going to go back to the other question you asked. Because we talked about what's the next thing, where's the next investment, where are we going to grow, right? How big is the industry? How big is WM, the other companies? I would tell you the other thing that we've thought long and hard about, and you hear us continue to talk from an investment strategy, is we still think there's opportunities to structurally reduce our cost, right? You hear us talk about technology, automation, optimization, being less labor dependent. And for everybody in the room who hasn't heard it already, it's not us walking folks out the door. It's the fact that the line to come into the industry, especially these frontline contributor roles, are that much harder to source and that much more expensive.
So I also see, I think Devina would agree, we spent a lot of time talking about investments sort of in the middle of the P&L to structurally lower our cost, modernize our business model. And I think there's still a boatload of opportunity. It wasn't that long ago, and everybody accounts for it a little different. We were 63-ish% operating expense, and now we're five, six quarters under 61%. And we feel like we've still got opportunity there. And that's a pretty efficient way to grow too, instead of go out and buying or investing in the middle of the P&L.
And yes, I mean, when it's been rolled out to the market, you talk about the number of jobs that might be eliminated as a result and through attrition. It's not RIFs and things like that. I get that. What I was trying to get to is, I think the bigger one is how do you improve safety? How do you improve productivity? How does it improve the quality of the job experience? Therefore, it improves retention. All those things sort of can technology be used? That incremental capital dollar be used to get those things to occur consistently?
It's just a very broad statement. We've talked about how do we use technology for safety. I think most of the companies in the industry probably use DriveCam or Lytx or some sort of technology inward-facing to help with coaching and behavioral changes with our drivers or our operators, and I mean, I think that's been a huge benefit, and when you talk about retention, right, we're certainly proud of the fact that, like everybody else, post-COVID, retention became and labor scarcity was a real thing, and we were probably 30-ish% total turnover. We're at 17% now for our drivers and worked really hard to do that, and probably around 20%-21% for technicians, so we learned some valuable lessons and some tough lessons about what is the real value of that human capital.
How much of that replacement is being done in-house through your own vocational training now?
We have two training centers, one in Florida and one in Arizona. And we're generally training about 80 to 90 drivers a week, every week. It's a two-week or three-week program, two weeks at the training center. We're training about 15 to 20 technicians every week. And we also have a program where folks who don't have a CDL can come in and get trained in one of our facilities. And we have folks that can certify them and issue them a commercial driver's license.
Really?
Yeah.
Oh, wow.
So that's a smaller number, as you probably would guess. But we're probably putting 100-115 people through these two training centers. We've expanded it now to heavy equipment operators, technicians. We're taking our frontline leaders from the collection and the post-collection side and actually putting them in a program with those folks. So if you're new to the industry, you're new to leadership, it'd be great to spend some time with the folks who are actually going to do the job that you're going to help them.
So, the quick math in the back of my head is that's low double-digit part of your replacement rate is sourced by that. The rest is you still have got to do it the old-fashioned way.
The majority of the folks who are coming in have some experience. They're commercial license holders. They've had some technical experience. I will tell you, when you have an outgoing technician who's been in the business 30 years or been a technician for 30 or 40 years, there is a challenge of the folks that are coming in do not come necessarily with the same strength from an apprentice program. So we're having to get a little further upstream with technical schools and high schools and all the other places to make sure that we're fishing in the right pond as well.
Okay, so here's a real non-sequitur because this is where did that one come from, Michael? But I've got this observation of don't laugh too hard. You've got this whole air pollution system, stuff that's going into the trucks. We're about to get into phase three. You're spending $30,000 on an engine overhaul, but you're spending probably $30,000 on the air system. And I'm sitting here listening to this being described to me. I'm like, well, why don't you buy one truck and two engines and get the second engine delivered? Because do you really have the talent to do engine overhauls anymore? You can train them to do preventive maintenance. You can train them to do the parts replacement stuff. But do you really have the talent to train for and have enough of them to do the overhauls?
The short answer is just everybody's probably struggling with that to some extent, but I also think, Michael, there's a technology solution here too. We've taken paper and pens away from all our technicians. Every technician everywhere, post-collection, collection, works with a tablet now. They've got sort of the access to technology. Why is that important? Because we have the ability to say, hey, Michael's going to do this, whatever the repair is. He doesn't necessarily have the skill set to do that. We know that Devina, who's on the other side of town, can do that. You have access to these people through technology to help, right? There's, I think, one of the solutions in terms of the skill deficit is being able to access the knowledge in other places than under the roof.
You have embedded knowledge in the organization, but not always effectively.
Yeah, I mean, there's access. I mean, there's plenty of ways to access the skill set and the knowledge. The limiting factor has been if they're not under the same roof with you, then how do you do it, and we're using technology to be able to advance that capability.
Okay, so I had an opportunity to go to Elkridge. They just ran a brand new facility. It's 50 tons an hour, Elkridge, Maryland, which is outside of Baltimore. One of the things that I thought was fascinating in the conversation was that the plant that it replaced was underutilized, that the community wasn't that great at recycling. You opened up this state-of-the-art and the darn thing's full, almost overfull. In the sense of now it's Maryland and it's a little different, it's in an area where there's a predisposed demographic to recycling. But I found it fascinating that that community perceived that they now had this high-quality resource and the participation rate improved that much in the marketplace.
So many times what we have to do is educate. And I think with the investment we were making in Elkridge, we were investing in community outreach and community education. And when people realize that recycling is not a myth, that recycling is not something that we just do and say that we're doing. And whether it's the AirTag tests that people have done that misrepresent whether or not a plastic bag gets recycled, we have a responsibility to ensure that people know that we are very intentional at taking what they put on the curb and ensuring that it ends in the right end-use place. And optimally, we can do that today better than anyone. And Elkridge is an example of the technology that can be used. And we called it the MRF of the future a few years ago when we were building it in Chicago.
It's the MRF of the present. And we are using technology to optimize throughput, product quality. And that product quality is increasing the value of the product on the back end. We're taking capacity and increasing scale. And when you don't have as much human capital intensity in the recycling process, because this technology has also improved that, labor dependency is down in very hard-to-fill jobs. And what that means is those plants are more scalable today than they were before. Because now you can run multiple shifts without having to increase the number of employees required to meet the community need. So in every aspect of increasing recycling for those communities, we think that the thing to do is ensure that communities understand the value of what's in front of them.
I have been in a lot of new plants in the last year. And one of the things I keep hearing, this plant's new, so you don't have enough time and grade yet on it. But you've got a bunch of them you've opened that you're not making any huge progress. And it's nobody's fault. It's everybody's trying the education on the contamination. There's some places to improve, but it's stuck in 15%-20% zone. It's not getting a lot better. But the technology is allowing you to get things out of that waste stream that you couldn't get out of before. So the actual residual pile at the back end might be down 10%, 15%, 20% because you now can get the six-inch clamshell or the polypropylene prescription bottle out that you couldn't get out in the past.
Are you experiencing that same opportunity where you've now got some time and grade and service and you've improved the quality or you've reduced the size of the residual pile?
The size of the residual pile is down, but the quality of specific bales is also higher.
So you've got less contamination in the bale, plus you've got more out of the input.
The technology has done that in a way that human capital never could have.
Yeah, yeah. Yeah, the near-infrared technology is fascinating, and if you set up the right pre-sorts in the beginning to get the big bulky stuff, the glass out, and then focus on the rest, it's amazing where we've gone with it.
There's also the pliability of the technology, right? As the stream changes, you learn about it. You can tweak the system to go after more of this or less of that. And that's something that's a lot harder to do if you don't have that technical capability.
Yeah, the Eunomia study that Ball Corp had them do for them, they're using 20-year-old waste composition data. It's like the composition of the waste stream has changed in five years.
Absolutely.
So how can you write?
There's not a lot of newsworthy writing there anymore.
Yeah, yeah, exactly. All right, so I'm still coming back to that incremental dollar of spend and thinking about capital. M&A just did a big deal. You got to leverage up a little bit. But it's a marketplace that's constantly in a state of change. So what's an M&A strategy until you get the balance sheet back where you want it?
We're currently a little north of three and a half. We expect by the end of the year, we'll be at 3.15 times debt to EBITDA. Our target's in the range of 2.5-3. This is going to be a really healthy, solid waste acquisition year for us. We expect to spend over $500 million on tech and solid waste deals despite having that elevated leverage and still being able to get down to the 3.15 by the end of the year. In terms of M&A strategy for us, we talk about a successful deal that was just done in Long Island. It was a white place on the map. People generally think that at WM, we don't have a lot of white space on the map.
But it's an indication of the fact that there's still significant opportunity out there for us to get deals done at the right price. And when we see the return on investment happen, it's just something that's a good core competency that is replicable that will continue to create value for the long term.
Okay. I'd add one thing to that, Michael. Devina covered it well. I think when you think specifically about Long Island, we kind of chuckled because when we handed the keys to Joe Winters and family in 2006, I was the guy handing the keys. So kind of a little serendipitous, here we are back again. But I think it brings up an important point, though, which is we clearly were not the right owners for that business now.
At the time.
Clearly, we feel different than we do. And I think part of it, it's not a.
So you're going to go back to Connecticut?
It's not a trade secret. I'm not going to comment on Connecticut. I love Connecticut. Nice people there. No, but when you look at the dynamic in Long Island with Brookhaven closing and the complexity of moving material off of that space.
Yeah, it's an island.
It is literally an island, and I thought.
But you have a lot of experience of that because Florida basically is Long Island turned on its nose because it's the same kind of long, narrow, and you got to move it a long way.
Part of what I was driving at is when you look at Long Island now or Florida. I mean, the ability from a network standpoint, it's not just the landfill. We talk about the landfills, but you've heard me say it's about the network and your capability to move it every day, all day, and you can't shut it off, and when we look at some of the spaces Devina was referencing, we look at that as a strength of WM. When we look at some of these assets, and I'm giving you one that's real-time, there's a different dynamic there that exists now as opposed to 18 years ago, and that's one of the reasons it was so attractive. It's a very well-run company. It's a good group of folks who are out there. We're thrilled with it.
But at a higher level, there was another element to our thinking about why we saw that as a good thing.
And lots of people look in who don't actually understand the business very well and think that everybody who's in the landfill business is a prisoner to the landfill. And you're 25% of the volume going into the landfill. And yet, I think the more important point is the control at the loading dock and the curb. And then you'll make the best decision about the post-collection to maximize a return.
I mean, Devina said it. Our highest return on our recycling facility from an investment capital standpoint. People look at landfills, well, the EBITDA margins are really high. Well, that's not the whole story, right? There's a lot of capital intensity.
It 3x the capital spend on a proportional dollar basis.
So we've always said we're agnostic. We're going to make the best decision on moving the material wherever we get the best return for WM.
Where do you think we are on getting from the operator standpoint to continuous emissions monitoring at landfills?
Oh, boy. We spend a lot of time talking about that, and we got one minute and seven seconds left. I would tell you, we're on calls. Tara, myself, Devina has joined. There are countless ways and technology advancements that we're looking at every quarter with the team to be able to do that, whether it's satellite technology, drone technology, automated wellheads at our landfills. I mean, it's just, it is literally, it's so dynamic that every time you get on the screen with these folks, there's a whole new slew of technology they're bringing to bear there, so when do I think we get there? I can see a pathway there. If you asked me a year ago, I was like, okay, this is a really complicated question to solve for, but I can see a pathway there.
I don't know if I'd put a fork in a date and say I know exactly when it is, but I do.
It's less than a decade?
I think it's less than a decade.
Yeah.
One of the things that I think is really important on this topic is that we often talk about changes in regulatory environment. And that didn't necessarily come up today in this conversation. But when you think about landfill emissions, a lot of times people will assume that we're invested in this because the EPA or regulators are going to get out in front of us and require a certain thing. And at WM, we're committed to ensuring that we stay ahead of regulation, particularly when there's a commitment to people and the environment. And so what I have loved about all of those conversations that I've been part of is that the team is focused on ensuring that we're not just keeping pace, we're setting pace with regard to where this is heading.
I'm going to introduce you to Matt Vaughn when you come out on the 9th from Bothell because I think they've got some things to share with you as well that I think will be interesting. They're monitoring 80 facilities 24/7 around the country for emissions-related things. It's not a landfill, but it's interesting what they're doing.
Awesome.
We're at the end of our time. I don't know about you, but I got to go powder my nose and get dressed for the gala. I want to thank all of you for joining.
Thank you.
We are at the end of our time. Thank you all for being here.
Thanks.
John did allude to WasteExpo going to an every-other-year format. The next WasteExpo would be in 2027. It will be back here in Las Vegas. But the off-year is a conference-like program called the Waste Summit. Hopefully, it is going to be in Washington, D.C. And we will repeat and be there with the Investor Summit there as part of that. So look for all those communications as we go forward. Thank you for being here. And we appreciate you putting up with this for the day.