All right. Good morning. Thank you for being here. My name is Stephanie Yee. I'm the lead equity research analyst covering waste services at JPMorgan. Today, we are very pleased to have with us Waste Management or WM. We have COO John Morris, and then SVP of Field Operations, Rafa Carrasco. Thank you for being here.
Thanks for having us.
Good to be here.
Just a very brief background. WM is the largest solid waste company, landfill operator, and recycler in the U.S. or in North America, actually. WM operates in an attractive industry with disciplined pricing and meaningful free cash flow generation. WM posted almost $20 billion in revenues in 2022 and has a market cap of $62 billion.
For this session, we're doing a fireside chat, and we'll leave some time at the end for any questions from the audience. Maybe we can start off with just some of the key trends that you're seeing in the business. What are some key indicators that you're monitoring in this environment?
Well, I think when you look at the portfolio within WM, we see some leading indicators. We see some lagging indicators. Overall, I think what you just saw in the back half of the year was some moderation in a few of the channels in terms of overall volume.
We've made some intentional moves in our residential line of business to trade off some volume where we've seen margin compression, which has been even further pressured, frankly, by what's been happening from an inflationary perspective. I think what you saw in our guidance too is, you know, we're gonna continue to look to improve margin. Obviously, we've seen some margin flattening, even compression in some lines of business with inflation.
What you heard from us for pricing next year is still core price between 6.5%-7%, to not only recover what we've traded off from a margin perspective, but to start to look to improve margins next year. Some of that will come with, you know, as I said, pricing and some volume trade-offs in a few lines of business.
Also noteworthy is, when you look at next year, we said, you know, EBITDA growth for the business would be right around 7%, and that's inclusive of about an $85 million headwind between some renewable energy and recycling lines of business.
Those are still both very strong lines of business, but they are gonna show a little bit of pressure year-over-year. The solid waste business has really been resilient and that, you know, margin growth year-over-year, if you net that out, is probably closer to 8.5 or 8.6%.
Maybe just add one thing. I think something noteworthy as well is our national accounts volumes continue to grow. We take it as a good sign that our differentiated service offerings are being received really well by some of our larger customers.
I guess, by different customer segments, are you noticing any differences in behavior or different conversations that you're having, or it's pretty steady as you go?
You know, I think part of, to Rafa's point, that's the national account business is one area where we've really shown a differentiated offering. That is an area where we've seen increased market share growth. In terms of, you know, overall pressure on any particular line of business, you know, we watch things.
We're watching customer churn. We're watching our quality of service numbers, Net Promoter Score. We're also looking at things like bad debt and what not. We haven't seen any meaningful shift there other than what I mentioned earlier, some flattening volume trends.
Okay. I know there's a lot of conversation around costs in general. I know WM is kind of, you know, pulling some of those cost levers to deliver margin expansion in 2023. Can you kinda just expand on, you know, some of those cost levers and what you can do to drive operating margin?
Sure. Maybe I'll start on this one more broadly, and then Rafa, who runs essentially half of the business, the eastern half of the U.S. and all Canada can step in. I think what you saw in the back half of the year, and particularly in Q4, is some of the things we put in place started to show up in terms of our operating expense.
And we said, excuse me, as we move into 2023, in particular, the last 3 quarters of the year is where we really expect to see operating margin start to improve. Part of that is due, again, we've taken, you know, we've been asked a few times, could we be more aggressive on price?
Certainly, we could pull that lever harder, but part of what we've been keeping a very close eye on is the Net Promoter Score and customer lifetime value. We're trying to obviously balance the long-term view of our customer base versus some of the immediacy of some of the inflationary pressures.
Part of what I would also say is when we talk about what we're doing on automation and some of the operating technology investments we speak of, over the long term, that's really to fundamentally change the cost model and bring down our operating expense model.
I would add that what we've seen really is moderation across the labor, the direct labor line of our cost bases. What continues to be stubbornly high is maintenance and repairs and subcontractor costs. I think something that's gonna help us, particularly in the back half of the year, is gonna be our fleet deliveries are actually gonna start normalizing.
In 2021, we received maybe 80% of our already reduced allocation of fleet, and in 2022, only about 57%. You can imagine that, you know, the age of the fleet starts kinda wearing and the costs, you know, get higher. A lot of focus is gonna be on putting those assets on the street really quickly and being efficient through the titling and registration of the vehicles.
Okay. You mentioned Net Promoter Scores. I guess, is there an industry average that you guys benchmark to, or is it something that you track internally? Are there different NPS for different customer segments, or can you kind of just elaborate on how that's been trending?
I was gonna say short answer is yes. No, true. Our Net Promoter Score, clearly, first and foremost, we look against what's happening and the folks we compete against and what we're gonna need to do in order to differentiate our services. I think the good news is, over the last handful of quarters, we've seen the NPS score increase.
To your question, though, it is, it is different between each line of business. What we might find from a commercial customer versus an industrial customer versus residential, different metrics. Again, we're trying to do that on a customer-specific, from a customer-specific view in terms of understanding what a industrial customer is gonna expect from us and what drives the NPS score versus, say, a residential or a commercial customer.
Yeah, we've been also very deliberate in trying to link up what the customer experience through Net Promoter Score is telling us and what our operating platforms are delivering by way of service.
A lot of our business intelligence is kind of geared to actually bridging that gap, giving us better insights on kind of what is really a correlation between service disruptions versus some sort of association or something like that, or causality. We're better able to actually target the Net Promoter Score at a district level, which is really helpful in terms of driving it up.
You know, the one thing I might add, Stephanie, is that is an area of the customer-facing part of our technology investments has been a place we've been really pleased. We've been because our customers can tell us we'd rather transact over this or over another device. They wanna transact when they want and how they want.
Part of the move has been, Rafa mentioned labor, one of the areas that has been a challenge is our customer experience folks, right? This is a matter of us not being as reliant on that segment of labor and using technology not only from an arbitrage standpoint, but also in terms of improving the customer experience. That's part of what's driving these quality scores and the NPS score.
Okay. Maybe we just switch over to pricing for a little bit. The industry has now been known as having good pricing discipline or good pricing power. Can you kind of touch on what have been some of the drivers? I know in the past year it's been cost inflation, but is there more opportunity on the landfill side, for example? I think Waste Management really led the industry's efforts in becoming more pricing disciplined. If you can just kind of talk about some of those drivers.
Sure. I mean, you know, we talk about pricing in generalities, but the reality is we've looked at it and continue to look at it by line of business. I think when you look historically, our commercial industrial pricing practices have always been strong. Over the last handful of years, we've really taken another, a deeper dive into our post-collection.
I say post-collection separately than landfill because it's very much about the network of assets that we have. We have 260 landfills in North America, but we also have 350 transfer facilities. Those facilities obviously position us to move that material the most efficiently we can and best service our customers.
We've been looking not only at our landfill pricing, but our transfer station pricing, which is really a remote gate to our landfills. Clearly, that's been an area because of transportation challenges where costs have gone up. If you look at our post-collection pricing, specifically our landfill pricing, we continue to see opportunity there.
Part of it is that the cost of construction, the cost of developing these landfills, continues to go up and is seeing some of the same inflationary pressure. I would also add, though, that with 260 landfills, those are very valuable finite assets. Now, we have plenty of airspace now, but we're also taking a long-term view of what that space is gonna be worth today, tomorrow, and from years to come.
Residential is another line of business where we've talked a lot about. I certainly have talked about it, I think, on every earnings call for 5 years since I became COO. That's an area of the business that continues to see kind of pricing or cost pressure, partly because it's so labor-intensive.
That's a place where we continue to frankly, we've traded off volume for to get the right margin and the right returns in that line of business. We're gonna continue to do that. I think for last quarter, it'll keep me honest, if you look and over the last few quarters, you've seen volume down 3+% and you've seen revenue up. It's pretty clear on what we're trying to do there. I want the residential line of business, we want the residential line of business to compete with all our other lines from a return and margin perspective.
I'd say maybe something else that's kind of worth keeping in mind. I keep repeating, you know, about business intelligence because we've made tremendous investment in really enterprise analytics and data management.
One of the things that we're doing is kind of extending that discipline, that programmatic approach away from just the collection line of business, customer lifetime value, to actually managing customer, I'm sorry, airspace value over time. That's another key component of how we're gonna be pricing landfill and transfer station.
You mentioned the residential line of business. Is recycling part of the equation in trying to move up the margins of that business? How does that factor into?
The short answer there is yes. I mean, about two-thirds of the volume that run through our MRFs, the single-stream MRFs, comes out of the residential line of business. That is not only what's on WM trucks, it's from third parties as well. The short answer is yes. In order for us to get right returns on our MRF, we need to have a market rate, whether it's third party or whether it's internal.
We're very careful about how we approach that because we don't wanna subsidize any part of the business. As recycling prices go down and the fee-for-service model goes up, we make sure that we pass it along to our internal customers to make sure that we're making decisions about what residential contract we do or don't wanna take. If it's gonna be on our vehicles, that we make sure we have the right cost model in there. Yes, we just pay a lot of attention to that.
Okay. Just in terms of pricing, as we're looking out beyond 2023, I think there's good visibility on 2023, but I know this was a while ago when WM last had your Investor Day in 2019, you had talked about an average yield of about 2% in that environment. I guess, as we look going forward, do you think pricing will be higher just on a sustainable basis, you know, into 2024, 2025, just given kind of the environment that's changed over time?
I wish I knew what was gonna happen with inflation longer term, which clearly I don't. I think that's the key for us is that, you know, in 2019, we did Investor Day down the street here. We were looking at a much different macro environment and a much different inflationary environment.
I think what we've commented on is making sure that we preserve and improve margins, depending on which line of business you're talking about, is really the key. How that translates to a core price or a yield number is sort of relative to the environment that we're working in. I think clearly we've seen a lot of inflationary pressure. We see it moderating a little bit.
I wouldn't say we're anywhere near out of the woods, but we do see some moderation as we end the year and look into the beginning of 2023. Again, our focus is really around maintaining and improving margin on top of this cost pressure we're seeing.
It's been multifaceted in every line of business. I mean, we talked about landfill pricing a minute ago. We also have had a hallmark year in residential pricing as well, and you're seeing kind of that contribute to the yield, the gap between the yield and the core price actually shrink.
I think to your question about kind of moving forward beyond 2024, I mean, I'm with John, I wish I knew, but what I can tell you is, you know, this disciplined approach has paid dividends for us, for now several years. So I don't think there's any reason to really deviate from that.
I would offer though that when we think about longer term change in our operating model, we've talked a lot about our investments, customer-facing investments in terms of technology. We're also doing a lot sort of on the middle of the P&L to improve and change our cost model.
We talk about automating elements of the business. You know, we've said that we're going to avoid the need, is the way I put it, to replace somewhere between 5,000 and 7,000 jobs when we started this conversation. We've started that with our customer-facing folks. Again, a lot of these folks are getting reskilled and moved into the business elsewhere. That's one example where we're having a hard time getting those folks to come in and perform those roles.
Us automating some of the customer-facing technology is one way that we're gonna move away from that need. I think within the business, you've heard us talk about, we started, God, four or five years ago, really thinking about not only how can we improve this fee-for-service model around recycling, but what do we do with technology to automate elements of that business.
If you go into some of these automated MRFs, we call them MRFs of the future, but I just call them our recycling facilities now because that's the model going forward. We are seeing tremendous lift in terms of our ability to drive margin to lower, to improve our safety numbers, to drive throughput through these facilities and meaningfully improve margin, even in a compressed commodity market.
Now, when, you know, we've got some other things we've spoken to within the collection line of business where we are building and automating elements of how we route and move our assets, and in particular, the 15,500 collection vehicles we put on the road between here, the U.S. and Canada. We're making real meaningful changes in the technology investments that are gonna drive that business model to be more efficient.
It's been a few years since you acquired ADS. I know most of the integration is done. I think you're still trying to upgrade some of the trucks at ADS. As you look at your footprint today, how do you feel about your footprint? Do you think there is additional opportunities for consolidation or additional acquisitions, or is the industry pretty consolidated at this point in your view?
maybe I'll-
Yeah.
Kick this one off, Rafa. Yes, the short answer is we're very pleased with how ADS went. We really, the team did a phenomenal job on integrating the business, driving synergies and all those kind of things. The short answer is we're very pleased with ADS.
It is noteworthy, and we said when we bought ADS, they were about 400-450 basis points below us in terms of margin. When you look at our margins today and the improvements that we're suggesting we're gonna make in OpEx and EBITDA margins, we are bringing ADS, the legacy ADS business, along with us. I would say in terms of our footprint, we still see opportunities, certainly for tuck-ins.
I think we did just under $400 million, Ed, of kind of traditional, M&A last year. We still see opportunities, but I think we're gonna continue to be opportunistic and disciplined about where and when we do those acquisitions. I think that's been our history, so.
Yeah, maybe worth adding, we, you know, I already talked about the fleet, you know, part of the drag of those 400 basis points was really sort of upgrading that fleet to a newer fleet, a more modern fleet with the type of technology that we wanted on the trucks. That's been slower to come to fruition.
While we actually exceeded the synergies that we anticipated with the ADS acquisition, we still have opportunity there, so we're excited about that. The other piece of that is on the residential side, we did have acquire a large number of residential contracts that we had to bring into the fold of our business improvement plan to actually automate those routes and actually improve the margins in that line of business as well. There's opportunity there still we're excited about.
I was just flipping through one of your recent investor presentations, and I noticed that environmental services is listed as a growth driver. Do you see opportunities to expand in that line of business, and can you kind of elaborate on what opportunities you're looking at?
You know, when I think about kind of environmental services, I mean, the hazardous waste business comes to mind. You know, we're not the top player, but we are a significant player in the industry in North America. Continue to stay focused on growing and developing that business.
We certainly are presented with other more service-oriented opportunities. We've been, haven't leaned in as hard on those, but we continue to look at them. I would tell you that our real focus right now from an environmental services standpoint is really around what we're doing from the hazardous side. We do a lot of work with and obviously coal ash.
In plant services, we do a good bit of work through that team in terms of being in with our customers, think big manufacturing facilities, and we're pleased with that business. In terms of acquiring a true service-related business, I think that would be a time and place decision.
The investments we've made in sustainability have also sort of opened the opportunity, particularly for our customers on what's core business to us, right? Sustainability is definitely that renewable energy, recycling as well. You're seeing that evidence in some of the requests that are coming, particularly from our larger customers, and that plays into the national account comment we made earlier.
A lot of sort of consultative support. The success we've had with the WM Phoenix Open as well and the zero waste. A lot of sporting venues, teams that, you know, that sort of thing are asking for us, for our support there as well.
Okay. maybe we'll just switch to talking about RNG. We might come back to recycling if we have time. Can you kind of just tell us about the RNG opportunity for WM, how it's become such a big kind of opportunity, and what's transpired over the last few years?
Maybe I'll start more broadly. Then Rafa can jump in with some of the specifics. Certainly, it's gotten a lot of attention of late with things that are going on in the RNG business and the RIN markets and whatnot. The truth of the matter is, we've been in the landfill gas to energy business for decades.
You know, we've been managing gas coming out of our landfills, methane coming out of our landfills for probably three decades. We've obviously got the technical expertise within the business to be able to build and operate these facilities. There's a handful that, for legacy reasons, are third party, but for the most part, we design, build, and operate these landfill gas facilities.
The difference is now, with everything that's going on with the RNG market, RIN market, is that we're now pivoting to taking that gas and instead of converting it to electrons and staying as a molecule, we're making renewable natural gas.
What's important about that is we've been on probably for the last decade, a journey to really convert our fleet from traditional diesel propulsion to CNG. About 74% of our trucks that are on the road, so we were average about 15,500 trucks a day run on CNG. About half of those trucks now run on renewable natural gas, and about half of that gas comes out of one of our facilities.
When you hear us talk about building out landfill gas to our RNG facilities, we're able to close the loop, and we still have a lot of opportunity to take that gas out of our landfills, clean it up, repurpose it, and put it back in our vehicles. From a closed loop standpoint, that really has been a terrific story for us.
With everything that's being talked about, where the RIN market's gonna go, the RNG market, et cetera, this is a lot of upside for us, and that's why you're seeing us. As we get more clarity around what the long-term markets are gonna look like, you see us making these out, these outpaced investments in our RNG plants.
Maybe some data points to kinda help you frame the understanding. We produce or generate somewhere to the tune of about 120 million MMBtus. About 45% of that is actually beneficial use. The opportunity is enormous for us to capitalize on that. That's why the announcement of the investment of the close to $1.2 billion really is to stand up about 24 sites that are gonna help us generate, once we have the run rate up in 2026, about $500 million in EBITDA, $400 million in free cash flow.
I understand, you're still working through some of the contracts, you know, thinking about which customers to contract with. As you're thinking about that decision, how do you know, how are you weighing the cost of the length of the contract, how much optionality you want, to RIN pricing? I guess, do you have to sell to a transportation customer in order to generate RIN credits?
In order to generate a RIN, it's a transportation-related sale. As we've also talked about too, we're taking sort of a portfolio approach to how we're gonna sell the gas. I think last year, we were about 30% of our gas that we produced was fixed, and we said that number probably grows to about 40% next year.
In terms of duration and the type of contract, whether we go fixed or whether we stay in the transportation market, we wanna take a portfolio approach to kinda narrow some of the range of volatility for the gas sales.
Okay. As you're kind of thinking about the supply and demand balance in general for RNG, I guess because, you know, you guys have been investing in this area, a lot of other players are investing in this area, could you see a situation where there's a lot of RNG coming online at the same time, and that demand maybe not being there for your, you know, your product?
I think, I don't know the statistic. I'm trying to recall it, When you look at the demand for compressed natural gas versus RNG, we don't see a lot of risk there. Obviously, we have a lot of opportunity, frankly, just within our own fleet, to build out these facilities and close the loop even with our own fleet. We are also seeing a pretty healthy demand for non-transportation related RNG, right?
Where you've got industrial customers who are saying, for whatever the reason, part of their sustainability initiative, "We'd like to buy your, the natural gas coming out of one of your facilities 'cause you get the environmental benefit from it."
Overall, I think, what you're seeing is a portfolio approach to how we're gonna monetize, the gas, whether it's a fixed price contract or through a transportation channel. I think outside of that, we feel pretty comfortable about. Very comfortable about the investments we're making.
I think if Tara Hemmer was here, she could rattle the statistics pretty easily about that. There is a huge chasm between the amount that can be generated and the amount of demand out there. We also have markets internationally that we could tap. We're really not worried about that being a constraint.
Okay. You guys recently talked about the eRIN opportunity. I know it's still very early days, but can you kind of just help us think about how you think that market might develop? Like, who are the buyers? Do you see the value of eRINs potentially being similar to the biodiesel RINs that we're talking about?
I think what you said is important, which it's still kind of a moving target. I think the good news for us is we've got 65 or 66 landfill gas to electric plants that are running right now today and have been running for decades. That's really where we got into the landfill gas to energy business.
If the eRIN market does develop, we have the opportunity without really any capital investment to take what we're doing in those landfill gas to electric plants and run it through an eRIN pathway should that get developed. There's a little bit of wood to chop there in terms of us being ready to make the investments.
I would tell you that Tara's team, our government affairs team, are very much engaged in following the regulatory changes that are at least penciled out at this point. I guess the last point would be if there is a pathway that is truly established for eRINs when the Set Rule is fixed later this year, we're in a very good spot to take advantage of that.
Just, just for clarity, does, you know, is the eRINs targeted primarily at electric vehicles? If there is any infrastructure that needs to be built, you know, what might that look like?
You know, it's interesting, Stephanie. This is maybe a little bit off the question. We get asked the question a lot about can you guys go to electrification? There's an infrastructure question there, right? Even if the eRIN pathway gets fully established and written in pen versus pencil, there is a question out there because we run the largest, have right now the largest heavy-duty CNG fleet in North America.
Folks ask, "What could you do from an electrification standpoint?" No different from how we pivot from traditional diesel to CNG. We still see the opportunity if the eRIN pathway gets closed and the infrastructure is there. We would have the ability to pivot from what we do with our fleet right now into an electrified fleet for heavy-duty vehicles. Right now, we're piloting.
Certainly everybody sees what's going on with passenger vehicles and the improvements that technology's made. We're seeing that slowly migrate into kind of the medium duty space, and we've got a couple hundred vehicles where we've got in the fleet that are electrified. We're also doing a lot of pilots with Class 8 manufacturers.
Class 8 is a refuse vehicle for those in the room here. We're piloting that technology. I do think we collectively think our fleet folks would tell you the battery technology is advancing. Whether it's gonna be, you know, we're gonna get to the point where the parasitic load of one of our vehicles can be met by an electrified electrification. I see that down the road as a possibility. The big question is the infrastructure gonna be in place for us to plug in, so to speak, 15,500 vehicles every day?
We replace close to 2,000 vehicles a year when the supply chain works adequately, so the pivot can be rather quick.
Okay. I just wanna pause here and see if there are any questions from the audience. Otherwise, I can keep going. Okay. Let's jump back to recycling. Can you just help us understand, is recycling a bundled offering with your waste collection business? How far along are you guys in converting to fee-for-service? What are the roadblocks getting to 100% fee-for-service?
The first question on the bundled part, the answer can be, it depends on the customer, right? There's certainly relationships. We have our customers, where they bring us material, we process it. There's relationships where we pick it up and process it ourselves. We've got national account business where we take, you know, big box retail materials, repackage that and sell that. It depends on the relationship with the customer.
As I mentioned earlier, about two-thirds of the volume we process in our recycling facilities comes out of a residential source, either ours or a third party. You know, the interesting part about recycling is if you go back, you know, the business traditionally, and I've been with the company a long time, the business went as commodity prices went.
What's interesting is, if you look at what's happened over the last four or five years, where we've gone to this fee-for-service model, we've tried to strip out as much of that commodity risk as we could. You know, the sort of the old days it was, we built the plant, we operated the plant, and we took risk on material, and the customer really didn't have a whole lot of skin in that game. It's different today.
If you look at what's happening in our recycling facilities, and even in 22 when we really saw commodity prices go off sort of a cliff in the back half of the year, we still have solid margins in our recycling business.
More importantly, the plants that we've automated are really outpacing even some real low commodity markets are the balance of the recycling facilities. Not only from a financial performance standpoint, I mentioned earlier, the quality of the material coming out of the plants is better, the throughput out of those plants is much better, and we're seeing a marked improvement in our safety statistics.
To answer the first part of your question, it continues to be a moving target on the fee-for-service model. We're probably 80% or 85% of our relationships with those processing customers through that fee-for-service model. In some cases, though, Stephanie, there are contractual relationships we have that are suitable for us. Take the commodity risk out. Might not be true fee-for-service models, which is why you see that 15% or so still lingering out there.
I like to give an illustration to kind of sum up what John just talked about. In 2017, pricing was about 60% better than it is in 2023. In 2023, we're expecting 13% more EBITDA than we generated in 2017. That gives you a sense for the magnitude of the improvement on the fee-for-service side.
You mentioned that margins in recycling is pretty good, because of the changes that you've made. I guess, is it comparable to the collection business?
I would tell you, commercial landfill margins have always sort of been the highest. I would tell you, recycling is about on par with our industrial line and higher than our residential line. As I said, that's our... the whole recycling processing line of business.
The investments we're making in automating these facilities and actually even building a handful of facilities in new markets are what we're really excited about. As I said, even within our portfolio now, those investments that we made are really throwing off terrific returns and solving a lot of other challenges for us. I talked about safety, labor arbitrage, et cetera.
From a return on invested capital front, it, recycling is only second to commercial. It'll actually drop to third once the RNG investments come fully online. It just gives you a sense for how profitable and how efficient, capital efficient these investments can be.
Okay. Can you talk about some of the recycling investments that you're making? The ones that you outlined with, the RNG projects that you kind of unveiled, are any of those the MRFs of the future? I know you kind of talk about it all together now, are any of those the MRFs of the future that you're building that's included in those projects?
Yeah, I mean, I can't think of an example where we're. An investment we're making in retooling a recycling facility is because we see the opportunity to draw the operating costs down. As I said, we've got enough history now, starting with our plant in Chicago. That was truly the MRF of the future.
Now we've been through Raleigh, we've been through Salt Lake City. I'm gonna forget a few of the markets. When you see us commit another $1 billion, which we have between now and 2026, to recycling, I think that really speaks to the confidence we have in the, in the facilities that we're that we're gonna improve or the handful of markets we're gonna build into.
We're expecting to be able to say $240 million contribution on the EBITDA side, about 60% really is commodity price agnostic, which is an important element. Keep in mind, that's just product quality and efficiencies on the cost side as well.
Okay. Devina's not here.
Uh-oh.
-didn't prepare too many financial questions. I guess, just in terms of one, you know, financial metric a lot of investors pay attention to is the free cash flow conversion. Are there any ways for Waste Management to kind of increase that, you know, that conversion rate? I guess, do the RNG projects perhaps play into that equation?
I don't need to phone a friend on this one. I think I can get through that one. What I would tell you know, we've fielded a lot of questions on the RNG investments and, and the sustainability investments, right, between recycling and RNG. I think the way we've kinda thought about it is, you know, from a capital allocation standpoint, obviously our dividend takes priority.
Then we've got, you know, the other options after that. Do we go out and acquire or do we buy back shares? When you look at the financial returns and metrics around doing that versus what we're gonna do, in particular, say with these RNG facilities, even if, even if you bought an acquisition and post synergies, you got down to 6 or 7 times.
You know, we're looking at a 3 times turn on what we're doing with these RNG facilities at $26 per MMBtu between RINs and what we see gas at. We think that over time is a conservative number. When I think about cash flow conversion and where we've really fielded a lot of questions, which is on this outpaced CapEx over the next handful of years, we feel good long term about the conversion on those facilities.
Not to mention the fact I think we've been between 45% and 50% conversion historically. When you look at what we're gonna put in, and Rafa mentioned recycling as well, and you look at what the conversion is gonna be on that $2+ billion of investment, we're very pleased with the direction we're going.
Okay, great. We'll see. Are there any questions from the audience?
RNG recycling can you invest more?
I mean, obviously we've laid out. I think what we've got on the books right now, 24 RNG plants that were either built or are building. Obviously we're prioritizing those. You know, part of what drives that RNG investment is not only whether it's how fast we can build them, and we don't really have any supply chain issues on there, but there's obviously some regulatory concerns with connections and all those kind of things.
We feel good about the pace of what we're doing on the RNG side, and we feel good about those 24 plants. I think what you're seeing is on the recycling side, when you break down that $1 billion of capital, I think it's about 43 projects, I think, between what we're gonna do to retool.
Mostly, most of that is retooling our plants. I think there's seven or eight more new markets that we're gonna go into in the recycling side. I think when you look at a depressed commodity market on a traditional recycling side, that shows our confidence in the capital we're investing in that.
Yeah. Maybe worth adding, we talked about supply and demand gap on the RNG side, but we didn't do that on the recycling side. There's a couple things that are interesting is, with population migration, right from north to south, we're seeing a lot of demand come through in places like Fort Walton Beach, where we're about to start a new material recovery facility.
The demand is there. The other aspect of that is Extended Producer Responsibility is taking root not only in Canada and in states like Oregon and California and Maine, but it's beginning to be talked about in general. That's just gonna increase the demand from the consumer side for us to actually be players in the fee-for-service side on the recycling.
That's a good point.
There's plenty opportunity.
Okay.
Hi, can you just give us some highlights on your landfills? How should we think about them, legacy assets, your competitive advantage, liabilities, how full they are? Permitting.
I'll start backwards. Permitting.
There's a lot in that question.
There's a lot. There's a couple there. I'll start. you know, it'll keep me honest here, but when you look at the number of landfills we have, that number is up to, I think it's 259 active landfills right now, minus the 260. That's, that's one metric we obviously follow. The other metric is what is the, what is the airspace that we have? Not necessarily built, but permitted. The team has done a really good job of keeping that number north of 30 years, I think at thirty...
Thirty-eight.
Yeah, 38. Even though the number of landfills has dropped in the portfolio, the amount of airspace that we have has maintained it, you know, that 38 years. I think what we focus on a lot, and I made the comment earlier, the landfills are certainly an important component of that, and especially in, you know, we've always said we are probably in the top 20 markets.
We're probably got the best or tied for the best position in the majority of those markets, 16 or 17 of those markets. What we are seeing is the value of the transportation network we have is becoming more and more important. As you see some, you know, urban landfills, if you will, start to close down.
I mean, I spent a lot of my career here in the Northeast and in particular in New York. The volume that comes out of here, if you're a resident of New York City, travels a pretty long way to get to a facility now.
The reason I bring it up is because the value of the transfer network we have and the transfer capabilities we have is continuing to increase in terms of importance, and you continue to see investments there. On the legacy landfill side, I mean, we've been managing legacy landfills for decades. We've got a really talented group of folks who do that.
Frankly, I didn't comment on this earlier, but when you look at some opportunities to further accelerate some of these RNG facilities, sort of your question earlier, we're actually going back and look at some of these legacy landfills that still are producing gas and whether or not that's an investment opportunity that we may not have focused on a handful of years ago.
Yeah. Maybe to tie the loop there, like these active landfills will one day be closed landfills as well. The interesting thing is they will now be generating revenues, whereas before we were just simply accruing the cost of closure and post-closure, and then would just be a drag on the, on the P&L that way.
That will no longer be the case. We actually have examples where we're tying our active landfill renewable gas projects, for example, Fairless Landfill in Pennsylvania, with an existing closed landfill and then aggregating the gas to generate more MMBtus.
Can you comment on M&A? I mean, we've seen interest rates moving really higher last year. Do you change at all the willingness to sell or the price? What are you seeing and what are the main opportunities you're seeing right now?
I would, you know, if you were to ask me a year ago that same question, what we were seeing a year ago, and we still see is, you know, supply chain issues are really having an impact on some of the smaller operators. You know, Rafa referenced some of the statistics around the challenges we're having as the largest in the industry, getting our trucks.
That translates to some of the smaller folks as well. The labor piece is probably the one area where we have seen on the acquisitions we've done or the ones we've looked at, where we've probably seen a little bit more activity because frankly, we bought a customer, a company in the Midwest last year. True statement.
Jim called, picked up the phone to call and congratulate this person, and it was a 600 person operation. He called the owner to say, "Hey, we're signed. Congratulations. You know, you're gonna-- we're gonna be really pleased to acquire your company." The gentleman had to pull over because he was driving a front load truck. This is the owner of a 600 person operation.
Again, that's one anecdotal story, but there was an example where that was a long time post-collection customer for us. We valued them as a customer. They told us they were never gonna sell the business. As a family, it was a generational thing. We're not gonna sell the business. Until this particular owner got sick and tired of being the HR coordinator for the business, and that's where they ended up selling.
Anyway, that's a story around your question, which is we continue to see pressure where supply chain and the inability to acquire the right labor are pushing some folks to consider selling. On top of now, when you see the cost, what's going on with interest rates and what's going to happen with cost of debt and whatnot, we see that as a potential opportunity for us, and we're in a terrific spot to be able to take advantage of that.
Okay. Well, we are just right on, you know, right about time. Thank you so much for being here.
Thank you for having us.
Really appreciate the conversation.
Awesome. Thank you, folks.
Thank you.
Thanks, everybody, for listening.