Thank you for joining us, and everyone who's listening in on the web link, thanks for joining us virtually. I'm Michael Feniger, covering machinery, engineering, construction, and environmental services for Bank of America. At the conference, we have really the big three waste companies: Waste Management, Republic Services, Waste Connections. We have Clean Harbors tomorrow, and really, to kick off the fireside chats, we have the leader, Waste Management, with us. I'm going to pass it off to Devina and Mike just to introduce themselves, give a little background, and then we're really going to jump into some Q&A. So over to you, Devina.
Great. Well, Devina Rankin, CFO, been with the company 22 brilliant years and eight years as the CFO of the organization.
Hi, my name is Michael Watson, Senior Vice President, Chief Customer Officer, been with WM for 33 years. Last six or so have been in this role, previously in operations and revenue management across North America.
All right. Great. Great to have you here, Michael. Devina, I just want to start off. I mean, Waste Management, I think now has a $90 billion market cap. It's come a long way since you started at CFO. You rarely see a $90 billion market cap on the side guiding to 16%, 17% revenue growth, 15% EBITDA growth, and about 17% to 18% free cash flow growth for 2025. So unless you're tied to AI or data centers, you don't kind of see that growth of a company this size. So maybe you can kind of unpack a little bit how much of that growth is organic, some of the M&A you guys are doing, the investments that are yielding that returns to kind of help everyone in the room get on the same page of your 2025.
Yeah, I appreciate the context that's provided. It really is an exciting backdrop. And when we think about the outlook for 2025, I think what's most important is that it's on the heels of an excellent 2024. And we generated 11% EBITDA growth in 2024 and expect to generate more than 15% in the year ahead. And when you put that up against the long-range targets that had been 5%-7% annually, it indicates that we are outpacing both on an organic side and also inorganically the traditional growth outlook of the business. And we don't see that slowing down. What's creating it for us in the core solid waste business collection and disposal is strong conversion of price increases to the bottom line with efficiency and strong execution on the optimization angle of the business.
And so that's about 7%, a little north of 7% when you consider the alternative fuel tax credit expiration that could impact 2025. And so if I take that we're going to generate at the high end of that traditional long-term range of 5% to 7% organically this year, add to it the additional growth from our sustainability investments. And the sustainability investments are both in recycling infrastructure and renewable natural gas. So strong additive organic growth from those two that's over and above the 7%. And then combine that with Stericycle integration benefits generating $400 million of EBITDA growth in the year ahead. It all comes together for a great representation of the strong capital allocation discipline that this business has combined with our execution of the core. And the business is just shining.
Maybe just to flesh that out, I mean, let's start on just the collection and disposal side, your solid waste business. I think the algorithm you guys have kind of held investors to when you guys had your investor day in 2019, I think it was revenue growth 4%-6%, EBITDA growth 5%-7%, free cash flow growth 5%-7%. Clearly, we've been in some years where it's been above that. Maybe you kind of just unpack that, how investors in the room and online should think about volume, pricing, and why the last few years we've actually been at the high end of that, even above that recently.
Yeah. So first of all, I have to give a plug. We're going to have an investor day in New York in June of this year, June 24th. And so we're excited to update some of that long-range outlook. But you're right, in 2019, when we set that, it was 4%-6% revenue growth, which was basically, in our minds, a combination of strong execution on price and volume, and price being 2%-3%, volume being 2%-3%. And that was our outlook. When you look at what we've accomplished, it's been much more oriented toward the price side of the equation. The strong fundamentals that held up that volume outlook are still there, but we've made some intentional shifts in the volume that we're taking. And so we've reduced residential collection volume. We've increased volume at the landfill, which we had anticipated.
And volume in the recycling part of the business is growing at the same time. So post-collection volume is certainly continuing to see an upswing. The collection side, we're being more discriminating in terms of deciding which parts of the business we want to put our assets and our people to work at. And so all of those things together mean that we've outpaced the 5%-7% EBITDA and cash flow growth of the business because we are focused more on the higher return, higher value parts of the business and doing that with automation, doing that with cost control, and doing it with strong pricing execution that is customer lifetime value focused.
Let's just stay on the pricing for a second. I mean, usually investors think of pricing for waste. You kind of have two components. You have the open market and the restricted, which is more CPI-based. I mean, Waste Management's been having some of the highest pricing we've seen in years. So how should we think about with CPI that's kind of come down in the last few months or over the last 12, 18 months? How do we kind of think of the pricing, how you had such strong pricing in 2024? How does that kind of flow through for 2025 and maybe even 2026 if the CPI numbers are starting to come down a little bit?
Yeah, that's a great question, Michael. As we looked at 2024 and 2025, obviously 2024 was a real strong core price. It was in the middle upper sixes. It'll be close to upper fives in 2025. There is a small degradation in some of the indices we talk about, whether it's CPI-U, that's running about 2.9%, and CPI-WST, those are some of the other indices, is a little bit less than 5%. But I think the most important point is how we've identified the price-cost spread. And that's really where the margin comes in. I think our connection with where our costs are going, where we can get price, where we can't get price is where you see the margin expansion. I think historically we looked at price equaling margin expansion. That's not necessarily the case.
I think the work we've done on our customer lifetime value metrics, the sophistication of the data-driven approach, in addition to some of the work we've done that Devina mentioned on automation and technology is starting to make that gap wider, and I think that's the most important message is it's not necessarily just price or just volume. It's the trade-off, and I think the word we've been using has been disciplined and how we go after price and how we make sure we stay disciplined in our cost, both on the OPEX side and SG&A.
I definitely want to dive into the OPEX and the SG&A, the progress there. Just Mike, just to put a finer point on the pricing side, are you starting to see some pushback in the open market? How are you balancing the volume versus price discussion right now as we're kind of now years away from the inflationary environment where we had to keep pushing those prices? How are you guys kind of balancing the volume versus price discussion with customers?
That's a great question. I think the gross PI, if you think about the prices we put on the street, are a little bit less from a percentage standpoint. But we're using data and we're looking at where customers are to their peers, where they are in their customer journey. So where we put price in has really reduced our rollback significantly. And most importantly, it's the churn. And our churn has actually gone down, keeping that price up. So those three components dictate to me that we're doing the right things. And we're also looking at more of a long game versus, hey, this is the yield for quarter one, two, or three. It's extending the customer lifetime value. And that's where profit continues to grow as well as our price.
And Devina touched on it, but as we're wrapping up this pricing versus volume discussion, it seems like the residential portion is just becoming a smaller and smaller portion of your overall mix in some ways. And I'm just curious from your guys' vantage point. It seems like you're willing to maybe walk away from certain types of residential work if it doesn't meet the terms. How has that strategy kind of evolved in recent years? What is playing out in the market that's allowing you guys to do that?
I could start with that one, Devina. I think to me, it kind of comes down to two things. We have finite resources to provide service to our customers. The residential line of business is a high capital, high labor intensity, one of our more unsafe. But we've made investments in automation. You've heard us talk about the conversion from rear load to automated side loaders. We've made significant improvements in productivity, safety, and really drive our turnover. So the whole equation has worked for us. But it is a very strong price negative volume equation. But to me, several hundred basis points margin expansion over the last couple of years is really the answer there. And I think that strategy's played out. And we're not done yet. We've got a few more cycles of contracts that are coming up.
We feel that that strategy's played out very well for us.
Devina, I'm going to have to push a little bit on the residential side. I remember having Jim, the CEO, on the road. This was a couple of years ago. I think residential margins were like sub 10% EBITDA margins. You don't have to break it out, but are we well above that now? Are we making progress there?
Absolutely. So we used to say that we were high single digits on margin in the residential business. And we've seen a significant step change. And what I would say is it's improving profitability by doing less work. And that's the simplest way to think about it. And what's really important, and I would just underscore the points that Mike made, it's about working with our customers and our communities to put the best assets on the street that are safer for communities, more efficient in terms of delivering service, but they're safer for our drivers. That automated side loader is really important in terms of extending our value proposition to our employees. And extending the value proposition to employees is safety first.
And by really focusing on that with our customers and helping them understand that, we are making good decisions on where we'll continue to serve and where we won't. And it's not just about profitability. It's about our people.
Devina, I mean, this got touched on, but just to flesh it out. I mean, we talked a lot about price, but to Mike's point, it's also about cost. Bigger picture, I think WM's reported SG&A as a % of sales sub 10% for now, a few quarters now. I think that was something that didn't really feel possible three, four years ago. I'd just love to understand, Devina, for the audience, what has kind of happened for you guys to get the SG&A as a percentage to that level. Any buckets you would highlight? Where do you think that might be looking like if we wake up three years from now? What kind of investments are you guys making that's kind of helping us yield these types of cost improvements?
I would say it's three things that have generated the results. And it's technology, it's discipline, and it's culture. So technology, what does that mean? Is that where we can automate things with technology and be more efficient and productive, we're doing that. From a discipline perspective, we have a great focus on spending every single one of our shareholder dollars as if they're not just watching, but they're advocating. And then culture, it's about creating alignment and ensuring that each and every one of us feels that same responsibility. And what I think long-term we can untap is there's more room to go in terms of think about centers of excellence and using technology, whether it's sales coverage optimization or back office optimization. There are things that we can do to scale the use of technology to be more efficient and productive. And is it 8%? Is it 7.5%?
I don't know what the number is, but I will say that our continuous improvement mindset within WM means that we will continue to look under every rock to ensure that we're optimizing the way that we allocate capital, spend our dollars, and that starts in the back office.
I think the one point I would add along the digitalization and automation is around our customer experience. We've made significant shifts in self-service that has drastically reduced our cost to serve. That's a high turnover customer experience role, and our eligibility for our customers and adoption is still in early innings, so there's a lot more runway there for us to use automation technology to have a better customer experience, not only from a cost to serve standpoint, but to bolster our overall customer experience, so we've made a lot of progress on our sales coverage, how we use automation, how we engage with our customers, but there's some runway there.
Devina, maybe just to kind of quantify something, just what do you think? What was your cost inflation you felt like in 2024? And what are you guys kind of thinking for 2025? I know labor is a big part of it.
Yeah, labor is far and away our biggest cost category. And so it really starts on the front line for us. And wage inflation on the front line, we estimate it's in the 4%-5% range. What we have in our arsenal to combat that, though, is improved turnover. And as we exited 2024, we had the best frontline turnover rate that we've had in our history. And it's 300 basis points better than it was a year ago. And by creating that culture that I talked about and WM as a great place to work, it starts on the front line. And so the improvement in the 4%-5% really comes down to what can you do to stem the tide with regard to turnover so that that wage inflation isn't that much more?
Because replacement of that turnover is one of the most expensive things we do, whether it's in quality of service or in safety, and so if we can really optimize the workforce by reducing turnover and being people first, that's one of the things that will help combat that 4%-5% wage inflation that we see as structural.
Perfect, and I do want to dive into a lot of the longer-term stories and tailwinds that are happening. But I just want to quickly, with Devina, we've seen some news flow from Walmart on the consumer. There's been some discussion of rates are a little higher. It's weighing on some construction activity. Just love to hear what you're kind of seeing in the early parts of 2025 in terms of anything on the consumer commercial side or even on your specialty C&D side.
Yeah, there's a couple of ways I think about that. One is WM as an investment. And WM as an investment is a really great place to be when you think of risk-off trades because we're going to do well in any economic environment. So I'll give us a plug from that perspective. But the other, I would say, is we look at the waste stream as an indicator of the health of the economy. We've spoken for some time about what we were seeing in industrial collection trends. And there was certainly some softness in 2024 in industrial collection hauls. We see that continuing into 2025. It's one of the things that we expected when we gave our guidance and outlook for the year.
That said, small business container, the small and medium business part of the U.S. economy, the backbone of the U.S. economy, seems to be doing really well. And those volumes continue to be strong. So whether it's the commercial collection volumes or MSW volumes at the landfill, we're encouraged with the health of the underlying economy.
Good to hear, and maybe Devina, we can kind of talk about as a CFO, a few years ago, you guys made a big announcement around some investments you're making on recycling, landfill gas to natural gas investments. Maybe just for everyone in the room, we could touch on recycling first. Just give the audience a timeline of how big these investments are, why did you guys make the investment, what the opportunity you see, and really a timeline for shareholders to kind of sort of see that benefit flow through.
Yeah, so $1.4 billion of investment over about a three- to four-year period, maybe five, three- to five-year period of capital investment. And the investment philosophy for recycling is one. It's one of our highest return on invested capital investments in the portfolio. And in addition to that, there's demand for increased recycling infrastructure from customers. So this was about improving the productivity of the asset network that we already had in place. And we saw an opportunity to reduce our cost to serve from recycling. And in particular, it's automation, optical sorters that are reducing the gross operating expense per ton by 30%.
Wow.
And reducing labor dependency and really hard-to-fill roles. Those are tough jobs and hard to fill. And so what we found the ability to do is reduce our labor costs, reduce our labor dependency in this part of the business, but also scale the opportunity for communities who are looking for sustainable long-term recycling services to help their community viability. We've seen those investments pay off exactly according to plan. And what I would say there is reducing the cost to serve, providing a better quality product on the back end. So that sorting is actually more productive and effective than the human sorting was.
So we're able to sort cleaner bales and then more differentiated bales such that we're getting increases in the street value of the product that we're "manufacturing." So all of those things have resulted in an improved profitability of the recycling business, which was already really strong for us. But it's one of the step changes in addition to the fee-for-service model that we had rolled out over the last, call it, decade. We've really seen the long-term viability and sustainability of the recycling business as a strength and one of the things that really gave us confidence in that $1.4 billion investment in the first place.
And Mike, just maybe on the customer side, just how important is it to be able to service the C&D side, the collection and disposal, and then also do the recycling? Do you see those synergies there? Because a decade or two ago, you used to actually have independent recycling type of operators. So just love to kind of sense from you what you're hearing from customers who are willing to pay for that recycling, even when commodity values have kind of been a little bit more volatile.
I think that's a good question. Devina touched on this a little bit. About maybe 30% of the investment was in new facilities where facilities were somewhat scarce. That's because there was a demand that was not met. So there is definitely demand for recycling. If I get more granular to the commercial customers, customers want to be sustainable. They want to be more environmentally sound. And having a recycling program is probably the easiest way they can do that. And that's how we try to make sustainability simple. It's just offer recycling to all of our customers. And that's grown significantly with these investments. But in addition to that, when we have multiple services, which will play into our investment in Stericycle, our customer lifetime value, our defection goes down as we provide a more comprehensive service solution. So that's also a positive there as well.
Thanks, Mike. And Devina, the second leg of this, we talked about recycling, but the other leg is the landfill gas to renewables. Just for the room, kind of explain the journey that you guys have been on. Obviously, you're the largest landfill operators in the entire country. Just what was the opportunity you guys kind of saw here and maybe the time on how we kind of think about the spending that's already occurred and how we think about the yield opportunity on the other side of actually driving the cash flow from it?
Yeah. So our renewable natural gas investments have been made with a backdrop of WM being the largest landfill operator, but also a really skilled investor in landfill gas to energy over the last 30-plus years. And then you combine that with the fact that we have the largest natural gas fleet in not just the industry, but across North American heavy-duty vehicles. And so all of those things positioned us uniquely to be able to take a natural byproduct from the landfill, which is the methane that is generated from organic material, and ensure that we're creating economic and environmental utility from that natural byproduct. And what is really exciting about this is the economic returns on this are a three-year payback. So $1.6 billion invested over a three to five-year period. We're substantially in process on 19 of 20 facilities.
We've already brought eight online, or seven online, expect to bring another eight online in 2025 in the fourth quarter. So we're making significant headway on the 20 facility buildout that we had planned and the payback on that's three years. And we're able to capture more of the economic value of that than anyone because we closed the loop with the utilization of a natural gas fleet.
And Devina, how do you feel about when you're out there monitoring the risks? We obviously have a new administration. This is something that comes up in our conversations: last time this president was in office, there was a lot more volatility around RINs. So far, RINs have actually held up really well. It might be a different program. But just for investors on the line, how do you guys kind of look at the risks and opportunities that we now have a new EPA and a new administration with the RNG portfolio?
Yeah, it's a great question, and what I would start with is that our business is a sustainable and consistent cash flow generator at its core, and that provides the right backdrop in order to take some level of volatility. But I'll also remind us that that level of volatility is on a really small piece of the base, and other alternatives to capitalizing this would still expose you to volatility. It's just in a different mechanism, so if you have a royalty, you're going to have volatility in that royalty associated with the change in the value, but if you own it outright and direct and operate them, you're going to have that volatility too, so the volatility is something that we are very intentionally focused on managing over time and managing through how we think about contracting the commodity sale.
And so we'll look at a good mix between spot contracting and long-term contracts in order to manage that appropriately. As I think about the administration and the implications, I think that it's really important to think about this in terms of the voluntary market and participation in renewable energy that's happening organically. And we see that as supportive of more stability in RIN values over the next administration than the prior one. And that's one of the things that will bolster the investment thesis that we made initially.
Perfect. And if we could move on to another big part of the story is Stericycle. For those on the line, Waste Management just acquired Stericycle. That was recent, the leader in medical waste. I remember Devina reading a very old Waste Management transcript from an investor day before Jim was CEO about ambitions getting into the medical waste. And I think it was going to be organic. And I remember asking Ed about this when I was ramping up. And it just never really happened, even though Waste Management always liked the medical side. So maybe tell us the journey of how Waste Management looked at medical, why it never really hit when they tried to do it organically, and why that led them right now to Stericycle. And then we could jump into more of the numbers.
Yeah, it's a great question and a reminder of our history, right? We talked about that we've both been here for multiple decades. And we've always liked the medical waste space and worked really hard organically to try and compete. But Stericycle really was a formidable competitor that made organic growth in the space really difficult. And so admiration of the platform that they had, the brand and recognition that they had in the market space, the platform really is a combination of brand and disposal infrastructure and processing infrastructure. And they had the leading asset network in the business. So we watched Stericycle as a potential acquisition target for many, many years. There were points that we thought it was too, one, expensive and two, too diversified. They had entered into some businesses that were less attractive to us.
And we think the management team had done a good job of rationalizing some of those other parts of the business and really brought it down into two things that tie into WM and our core competencies well, one being regulated medical waste and the other being secure information destruction. You can think of regulated medical waste as a fourth line of business, collection and disposal, similar to what WM does today. So a place we can maximize our core competencies, our know-how about the business, our use of technology in order to optimize routing and logistics. All of those things we do so well create natural tailwind to the operating viability of regulated waste as a fourth line of business. And then for secure information destruction, we're the largest recycler in North America. We've talked about that.
And so taking the byproduct of that service and attaching it to that recycling infrastructure just means we'll be able to get better market value for the product that comes out of it. And on top of that, we understand how to use that fee-for-service model in a way that helps the volume side of that equation be less of a factor than maybe it previously had been.
The one thing I would add too, in addition to everything that Devina mentioned, is just the industry itself. We looked at the growth trajectory. Aging population could potentially and probably will have a more favorable growth than the traditional MSW. So it's an additional platform for growth. We can get into some of the details, but we think about the opportunity for cross-sell, the internalization that Devina mentioned, as well as the OPEX and SG&A synergies. Those are all why we feel much more confident than before close to after close that we doubled our synergy target because of the opportunities and proof points that we have at WM. We feel that the journey that Stericycle's on is a perfect time for WM to join in and execute on what we have a real strong track record of doing.
That's interesting, Mike.
I'm just bringing it back to our earlier conversation when we talked about the solid waste algorithm. And it kind of felt like you guys were pushing more price and being able to capture more price. And then you mentioned with medical, it sounds like you think the growth is a little bit stronger than you would see in MSW. So if there is an algorithm for medical, how should we kind of think about the headwinds, tailwinds? Does it have the same pricing characteristics as we see on the solid waste? Or is it more actually that the volume growth is a little better because of some of these dynamics you talked about with the aging population? Just kind of curious how we should kind of think of the medical.
I think it's a little too early to identify what the price-volume mix will really look like, but what I do feel comfortable in is there's opportunity for improved revenue management based on what we've seen in our proof points. The revenue upside of the cross-selling, I also look at WM's share in the healthcare space. It's inferior to our average segment, so the upside of selling into the healthcare space and the C&I business is also a big upside, so you think about the customers that Stericycle has, Shred-it has in WM, there's a lot of opportunity to cross-sell that sometimes the decision makers are the same. Sometimes they're not.
But as we look at the growth trajectory of cross-selling, the sophistication we can put around pricing, and also some reduced cost of service as we bring these sales organizations together and have an overall better value prop of offering really a suite of sustainability and environmental services that's unparalleled. And that's what really excites me about the future, both price and volume.
Yeah, it sounds like there is that opportunity in the cross-sell. But Devina, it seems like there's also maybe an opportunity on the cost side. I mean, we talked earlier about you guys getting your SG&A below that 10%. Can you lay out what you're thinking of the cost synergies, the timeline there? And we just have to ask because Stericycle was a public company. There did seem like there were some ERP issues. And I'm just curious as you as the CFO, who's kind of overseeing this, how you guys are kind of approaching that as you tackle some of those synergy targets.
Yeah. So when we were looking at a public-public transaction, there's only so much that you can see. And we knew that they'd been on an ERP journey for several years. And we'd been on similar journeys ourselves and knew the value that could be unlocked from having more sophisticated and modern toolkits in order to serve the customer and to carry out your business. And that was one of the things that gave us confidence in the original $125 million synergy target. And what you see with regard to the update of the $250 million synergy target is that that confidence isn't just there. We see even more upside potential. When we think about the categories of drivers for the $250 million of synergies, it really is three broad categories. And it's internalization, operating execution, and back office/SG&A optimization.
And the place that we've seen the most significant upside relative to our original outlook is in SG&A. In the fourth quarter, they were at about 24% of revenue within WM. And we think that long term, we should be able to get them structurally to about the same place that we are. That being said, over a three-year period, we are going to march toward 15% of revenue for this business. That's the goal. Now, will we get all the way there within three years? I don't know. Part of it is the ERP journey. And so coming back to that, what I would say is it was obvious to us from the outside looking in that it was hitting some bumps. What we do really well is leverage technology to optimize the business.
And so we know that, yes, the frontline execution and customer centricity and all of those things that we do so well in terms of thinking about this as another fundamental part of our business is important. But another competency is leveraging technology to scale the business. And optimizing technology in order to do the back office right and really use data as part of your core competencies is one of the things that we're going to be able to do. But investing and getting the ERP right is one of the things that's going to be required in 2025. And so we excluded the incremental costs that would be incurred in 2025 to invest in the ERP. We did that on purpose because we're still learning. We're only four months into owning this business, and we need a little more time. But we're optimistic that we'll get there.
Devina, as we just wrap up, it's interesting that your guide, your free cash flow growth is actually growing faster than our growth. I think some of the investments you guys have made are yielding. Are we setting up for WM to have a consistent next few double-digit free cash flow growth, 2026, 2027, 2028?
Yeah. We'll be prepared to give you the specifics on that. At Investor Day, what I would say is the backdrop is really strong, and cash flow conversion of WM is one of its strengths. And for us, it's revenue to EBITDA conversion, and having 30% margin in this business for the first time in our history in 2024 is an indication of the strength that we're creating there, but then converting every EBITDA dollar to more free cash flow is the other part of that. And we think over time we should approach 50% of long-term conversion of EBITDA to free cash, so if you've got 30% operating margins combined with that kind of margin on cash flow conversion, it's definitely a formula for growth.
Perfect. I think we just ran out of time. We're going to leave it there. I want to thank Devina and Mike for joining us.
Thank you.
Appreciate it.
Thanks, Michael.