We're coming to the end right here, thank you everybody who's persevered through the whole day. I want to introduce Tara Hemmer from WM. Tara, we've been asking people about the state of the industry with baseball analogies through the day, and you're batting cleanup. That's what I would say for right now. Thank you very much, and I also want to congratulate you on a recent promotion to COO.
Thank you.
We're going to run through questions that I've been asking others, and it feels like you have a unique position in terms of being the largest company in this space. In terms of providing the perspective, some of it is going to be industry, and then some of it is going to be specific to Waste Management or WM. I guess, given the size of the company and the scale, where do you see the company going in three to five years from now in terms of being able to grow the business? Like we started out with the baseball analogy. There's the industry, where you are, which innings you're in, and then for WM, which inning are you guys in terms of your maturity?
First off, I want to pivot from baseball analogies to basketball analogies.
Yeah
go Knicks. I just have to say that. If you look at our industry and you look at WM, the industry is just so incredibly resilient when you look at anything that is thrown at us. If you look at what's happened in the world the last year, we performed quite well. At WM, what we've really been trying to focus on is creating an even more resilient business model, largest in core solid waste over the last three to four years, significant investments in sustainability, so that's a number two vertical for us. Of course, the acquisition we did, WM Healthcare Solutions, number one player in medical waste. Finally, we do have an environmental solutions business. It's smaller than others, but we have capabilities there, and that's something that we can grow.
Diversified portfolio and have really leaned into technology as a driver over the last 10 years, that certainly has differentiated us.
Okay. Given where your margins are today and the amount of optimization that the company has done, you're talking about where the technology's done. Is there a lot more room for technology to help you improve your business operationally and bring it down to the bottom line?
Absolutely. I'm so incredibly proud of the work that we've done over the last 10 years. We were the first to install onboard computers in trucks. If you look at our leadership position on bringing safety technology to our trucks through DriveCam and Lytx, our routing capabilities, these really have transformed our operations over the last decade. What I love about working at WM, though, is there's still opportunity around every corner, we are leaning into leveraging technology across every aspect of our operations. You saw what we did at our recycling facilities and automating them. We're looking at how we can leverage technology and AI for routing capabilities, there's one that I would love to give an example of. I spend a lot of time in the field. It's one of my favorite things to do is visit our districts.
For those of you who are in the business, if you show up to a district at 2:00 A.M., the hardest job is the job of that ops manager who's trying to launch our routes, trying to make sure that all of our routes are covered, trying to make sure that everyone is safe, has the right equipment. Once they're done doing that, they then have to look at, "Okay, what is my day going to look like?" They're looking through systems.
We launched something called Coaching Intelligence, where we're using AI to pull out of all of our systems, then giving that ops manager, when they're done launching our routes, "Here are the three people that you should be talking to today." It's going to help with productivity, it's going to help with safety, it's going to help with employee engagement, that's just one way we're bringing technology to life today.
That's actually interesting. I've asked that AI question to all the companies, I believe today, that was a unique perspective in terms of where you're taking it from. Where are you on the core parts that everyone else has talked about, routing, pricing, and customer service? Where are you in terms of applying AI to those areas?
Leader, leader and leader. That's what I would say. We've been leveraging technology and tools on pricing excellence for the last several years. We have been using customer lifetime value, applying some algorithms on all of our customers, looking at have they had a missed pickup, how long have they been a customer, using that to be really prescriptive on how we price, we've been successful. On routing, we launched something on roll-off called Next Day Optimization, where we're using routing algorithms to help us with that. It is permeating every aspect of our business, we're continuing to evolve what AI tools and technologies we can use to make our existing employees more productive, also to look at where do we have opportunities to not have employees doing those tasks going forward.
Do you see, if we're sitting here in three years from now and you and I are still on the stage If you look back in three years, do you think that the AI initiatives over the last two years are going to make a meaningful difference in the margins of this company?
I think for us, it's interesting because we've had technology enablements driving margin improvement and enhancement over the last several years. We've consistently said between 50 to 100 basis points of margin improvement, and we've been delivering that and then some. We do anticipate that technology is going to help us achieve margin expansion that is consistent and replicable, and that's what we're set up for.
Okay. I want to shift a little bit more about just a little bit of the capital spending and M&A. There's a lot of projects, I think, that are going to be ending this year, so we're going to be seeing a meaningful step up in free cash flow for the company. When we think about that, should we see the company leaning more into M&A? Should we see the company leaning more into any other projects that they might be doing? Should we be seeing more dividends? Should we be seeing more buybacks? How should we be thinking about that additional capital that's going to be coming in?
We are going to be generating a tremendous amount of cash this year, and we anticipate generating a tremendous amount of cash in future years. Over the last, really, two years, you've seen us do two things with that cash. We've been investing in our sustainability investments, our core organic growth initiatives, and then obviously, we did a big platform acquisition when we acquired Stericycle. If there's one message I wanted to get out into this room, it's a little bit of myth-busting because we're often asked, "WM, you can't really do much in the way of core acquisitions because you're so big." That absolutely is not true. We have a strong and robust pipeline. There's markets that we can go into on the core solid waste side. And then, of course, looking at very near adjacencies like we did on Stericycle.
The other thing is, if you look at share buybacks, we've always been buying back shares. There's really just two times in our, really the last 15 years that we looked at with the IR team where we weren't buying back shares, and it was when we did big, large platform acquisitions like ADS in 2020, 2021, and then, of course, Stericycle. The good news is we have many uses for cash, and we're going to be pretty prescriptive about what is the highest and best use based on what opportunities we have in front of us.
Maybe digging in a little bit more to some of those, and you brought up one of them was the environmental services area. Could you see the company leaning more into that? It's an interesting area that's getting a lot of press now. The companies are doing well. We had Clean Harbors up here. We had Veolia up here. Could you talk about what WM is doing there now? What would be interesting to you? What's an adjacency that if I looked around, "Hey, we have this now, we could go here as opposed to going here"?
Well, we have four hazardous waste landfills and one hazardous waste deep well. We are in the post-collection space when it comes to environmental services. We really don't have much in the way of collections infrastructure or transfer infrastructure. What we really look at is, does our customer base want this as a service? There is a lot of overlap. We just bought Stericycle. They have customers who are healthcare customers that have hazardous waste as a service line. There are a lot of opportunities, really, when you think about what WM is good at, collection and disposal, routing and synergies, that sort of thing. We're absolutely going to look at it. We have to make sure that we can drive the right value and are we the right owner for a business like that?
Mm-hmm. If investors turn around, if in a few months or even tomorrow, if there's an acquisition in terms of collection, investors shouldn't be surprised about that. That would be something that would fit the profile in terms of adjacencies for you.
Yeah. It's part of the business that we have today, we would absolutely look in it. Again, though, same discipline that we apply to core solid waste.
What about further into the medical waste? Usually there's Stericycle, and then there's who else? Is there room to expand in that area as well?
Well, as you can imagine, we've been really focused on sort of eating what we've-
Killed
killed, I suppose.
Yeah.
There's a lot that we've had to tackle when it comes to WM Healthcare Solutions, right?
Yes.
It's no secret they were on their own customer journey, and really proud of what we've been able to accomplish in the last year, focusing on the customer journey. We wanted to make sure that our customer retention was on a good path. We've seen our DSO come down, which is an indicator of customer health. That's really been a focus of ours, also working on routing and some of the operational elements of the business. Really over the last 12 to 18 months, we've been focused on just making sure that our own house is in order. We could absolutely look at acquisitions in the medical waste space, and you might see us do that in the future. For now, we're continuing to focus on making sure that we're optimizing what we've acquired.
Sure. Once we're on the medical waste side, maybe we'll continue on this a little bit. Do you think that that unit, that business, is now kind of at a turning point? There was a certain amount of kind of stabilization. You had certain issues, obviously, with the ERP system, and it seemed like the company feels like it's moving beyond that, or it's starting to stabilize. That's what it sounds like the message is, at least on the public calls. Could you describe where you are?
I think turning point is great two words to describe where we are. I've spent a decent amount of time in the field visiting some of our locations, whether they're autoclaves or hauling locations for WM Healthcare Solutions and our shred business. The good news is our operating team, they're incredibly excited to be a part of the WM family. They see the tools that we have to bring to bear, and we're starting to layer those into the operating platform. On the sales side, you're starting to see us do a little bit more consolidation with our sales team and really focusing on cross-selling. We're seeing some of the leading indicators related to customer churn, and then also related to where we're able to cross-sell solid waste business at those large healthcare facilities.
That was really the thesis for the larger opportunity, where there were more cross-selling opportunities on the solid waste side than perhaps on the medical waste side. It doesn't mean that we're not going to have bumps in the road from time to time on customer retention. We have that in our core business, but we're in a much better spot where we have a clear view on what's happening with the customer base.
Just in terms of where you are with that ERP system, is it actually functioning the way it's supposed to, or is this a matter of we've got a lot of people there, if something's not working right, we're manually making sure that it works? Where is that?
It's a little bit of both. The system is in existence, the SAP system that WM, that legacy Stericycle had built. That system is in use. We do have people who are working on making sure that the bills are accurate and that they're going out accurately, we have a high level of confidence on that going forward.
Is that a system that you assume it makes sense for them to stay on, or is that, "Hey, we have a system that we use for WM that we eventually should migrate them to that, we were in the middle of this, we better get this finished with." How do you
Well, I would just say, anybody who's been through an ERP journey, and I'm sure there's a fair amount of people in the room, it's one thing to go on one, and then it's quite another to try and then go off one and go on another one. We have no plans-
Okay
to move them off of that system. That's one of the reasons why when you look at the legacy Healthcare Solutions, SG&A, we anticipate that being slightly higher than WM's core because they are on a separate system.
Got it. How does the pricing power and the price cost spread in that business compare to the medical waste? I mean, the solid waste.
Well, that's one thing that we've done pretty quickly is looked at our pricing systems and tools and taken those, and we're overlaying on the WM Healthcare Solutions customer base. That's been positive. They didn't have the same prescriptive pricing that they did. Of course, it was harder to do that when you're having customer challenges. Now that we're through that, we do think we can have the same type of pricing power that we have in core solid waste on our medical waste customers.
I want to flip back to sustainability, which I know is near and dear to your heart. There's a lot of projects that are going to be completed this year. Are there the next wave to come? If you look through the other landfills, the other RNG plants and stuff that you could put in there, how should we be thinking about that? Is that something that, "Hey, we finished this, and we got to go see," or is this like, "Hey, we're actively looking at the next thing, and don't be surprised if we're going to announce another wave of these?
Well, I'll break it into two parts. The recycling investments that we made-
Okay
39 facilities that we invested in, 12 of them were in brand new markets that we didn't operate in before, the balance were existing facilities that we automated. These have operated tremendous for us. If we look at them on a site-by-site basis, market-by-market basis, pretty much all of them, we're seeing volume growth at all of those facilities. You can see how our labor costs have improved, as we all know, labor generally is only going to go up when you think about that from a cost perspective and really safety-sensitive positions. A win-win all around. We did announce beyond that another facility in Canada that we're going to be building in Edmonton, that really is in response to extended producer responsibility.
We've demonstrated that in locations that have extended producer responsibility, our technologies are really top-notch and can deliver the quality of material that those communities need. See that as an opportunity moving forward as EPR is introduced in other states. We had one of our 39 facilities in Colorado that we're going to celebrate the grand opening of in July, the two other Canada facilities have exceeded our pro forma expectations. I would say you'll see us be opportunistic on the recycling side. Are there new markets, or are there EPR states that might be underserved? On the renewable energy side, one thing I'm particularly excited about is we built these 20 renewable natural gas plants, all of them should come online by the end of the year.
If you look at what's happening in the world today, and in particular in the U.S., fun fact, we're sitting in D.C., and 25% of the power that's produced in the D.C. market is used for AI, which is an astounding number. Our industry, and WM in general, we're the largest generator of renewable electricity in the industry. We have renewable electricity plants that we could expand and also build more of to be able to provide clean, reliable power to this next technology evolution. You might see us lean more into landfill gas for electricity versus landfill gas to renewable natural gas.
Interesting, because the next question I want to get in is a little bit that thinking about the supply and demand of the RIN market, because you're in a kind of a unique position to see what that is, and we saw an increase in the RVO, right? From what we saw, that plus the voluntary market, is that enough to absorb the supply that's coming on between what WM is adding this year, and all the public companies we talk about are adding supply as well. How do we think about that in terms of the capacity of the market to absorb that? Now, we have seen the RIN prices have been slowly going up, so obviously the market, at least in the near term, is going up. How do you see the supply and demand in the market right now?
For 2026 and 2027, there was a lot of work that went in by WM, industry groups, to really work directly with the EPA to get them to realize that the RVO needed to be raised. That was about getting them to understand how many natural gas trucks are operating in the U.S. We operate over 75% of our routed fleet operates on compressed natural gas. We have this unique circularity story, but getting others to the table that have other large vocational fleets that run on CNG, and then also getting them to understand the timing of the other plants coming online. It was a big win that they raised the RVO a bit for 2026 and 2027, and that gives us a lot of optimism for RIN pricing for 2026 and 2027 as a result.
What about all the supply coming out to the market? Do you think-
That was factored into the RVO.
Okay, you're saying you worked with your view of the market and what you saw, you were able to work with them, and you felt that that's appropriate-
Yes
for the market.
Yes. The other thing that's happening right now, we generate D3 RINs, which are the highest value RIN, but D5 RINs are sort of tied to renewable diesel. What's happening in the world today with diesel pricing and the war in Ukraine is having an impact on D5 pricing positively, which then also impacts the D3 RIN.
That's why we expect that pricing will be higher going forward.
Okay. Is that part of what's been impacting, you think the RIN pricing over the last few months, then it's kind of crept up from the
Yes
230s to 260s?
Yes.
That's
It's related more to the D5 RIN than the D3.
Okay. Interesting. Okay. Just a little bit of talk about in the collection disposal side. I want to ask you, how has the price cost spread changed versus what it was several years ago? Has it been fairly stable, and did it change in the inflationary environment, and how is it compared to before the inflationary environment? Are you better off in an inflationary environment? How does that work for your business?
Your predecessor once asked a question like that, which is, what is a good inflation number? The thing that I just want to convey is that we do well in any environment, so higher inflation environments, lower inflation environments, because we have the ability to price, and then we're also able to adjust costs accordingly. For WM, we've always said 150 to 200 basis point spread on that price cost spread. We've consistently been delivering more like 250, and what that comes down to is doing a tremendous job managing the middle of the P&L. We are operating better than we've ever operated, more consistently, less excess trucks. We've really focused on optimizing our fleet, how many routes we're running, how many spare trucks we're running, and a lot of this comes down to data and analytics, and that's helping us going forward.
I guess, just getting back, has the price cost spread gotten better or worse over the last few years?
Better.
It's gotten better.
Better.
Is it like in a consistent trend or-
Yes
it is consistent?
Well, you've seen that in our margins. If you look at our collection and disposal margins, they're approaching 40%, and that's a direct testament to the investments we've made.
Okay. When I think about it, just talking about adjusting your costs, how much of your business can you adjust kind of quarterly or monthly? Because we are seeing some of this with the higher diesel costs. Obviously, with you guys, with the natural gas, it's potentially less, but how do we think of that?
Well, 60% of our customers are tied more to open market pricing, and 40% of them are on some fixed CPI, or it could be water, sewer, trash. When you look at our segments, commercial versus residential, industrial, they're billed at different times. When you take all of that together, there's roughly a one-month lag on our entire business being able to not just price, but relate it to the fuel surcharge. We have very minimal impacts on being able to recover that in the short term. In the long term, we will absolutely recover fuel.
It's a one-month lag is what people should think about.
Yes
In your modeling. Okay. I guess when you think out longer term, you've been in this business for a while, are there any major trends that we should be thinking about as investors? We talked technology and AI. Is there something else that we should be thinking about over the next five to 10 years, just from an industry perspective?
There are really three that I think about. The first is landfill capacity and declining landfill capacity in key markets. I started my career with WM in January of 1999 in New York City, and the first thing that I worked on was railing waste out of the South Bronx to Virginia. Today, WM has six rail-served landfills across our network. I anticipate that that number is going to grow over time. Five, 10 years from now, I wouldn't be surprised if that number doubles. It's becoming incredibly difficult to first of all, it's almost impossible to build new landfills, but to expand landfills, it's getting harder, and regional landfills are going to become incredibly important. Leveraging the transportation network that WM has built.
We have rail capabilities on the West Coast, we have rail capabilities on the East Coast, in the Midwest, and that's something we're going to be leaning into much more heavily and will be important to our growth long term. The second, which we've talked about, and I think everyone up here has talked about, is technology. I'm not necessarily saying AI, but technology. Could be our conversion to automated side loaders. It could be what we've done in the recycling business. We're doing some things with heavy equipment. Of course, AI will overlay all of that. How do we embed technology into our business at all levels of our business and making, whether it's a driver, technology native, or our back office? That's going to be incredibly important. The third, there's no two ways about it, we are an incredibly labor-intensive business.
We are today, if you think about the men and women who drive our trucks each and every day, we need to make sure that we have access to the right labor pools, that we're training them appropriately. WM has had two driver training centers for almost a decade. We just built a new one in Canada for our Canadian employees, and we have much greater retention and safety results when we make those investments. Ensuring that we're thinking about the labor pool in the right way and tapping into the right not just types of people, but also bringing them along, because technology's going to be rapidly evolving. We need to make sure that all of our team members are in the right spot.
Got it. I want to dig one level deeper just on the rail side. When you are doing this rail or thinking of a rail expansion, is that something that's primarily, "Hey, we have our own tons, we want to ship them over because we need to support the collection business"? Is this something that you think of when you open it up that you might be going and taking more third-party tons as well? How should I think of that?
Rail lanes are incredibly difficult to stand up. They're capital intensive, it's not something that you turn on for a month and then decide to do something different. You really have to have a steady base load of volume going in that lane, it would be for our own purposes. Also, once you have it built, you can absolutely layer on growth to that, we've demonstrated that when we stood up a rail lane in Crossroads in Indiana and started small with a base load of volume and then have added to it over time. Same thing in South Florida. We have a rail move going from the Miami-Dade area to our Okeechobee landfill, we're able to layer on third-party volume to that as well.
Great. All right. We're coming to the end over here. Tara, thank you so much.
Thank you.
Appreciate your being here. Again, you wrapped it up.
Yes.
Thank you, everybody.
Thank you so much.
Thank you.