The operator introduces the WM Third Quarter 2023 Earnings Conference Call and hands it over to Ed Egl, Senior Director of Investor Relations. Ed introduces the speakers - Jim Fish, President and CEO; John Morris, EVP and COO; and Devina Rankin, EVP and CFO. He also mentions that a Form 8-K has been filed and all forward-looking statements are subject to risks and uncertainties. John will discuss results in yield and volume, and Jim, John, and Devina will discuss operating EBITDA, with comparisons to the third quarter of 2022.

In the third quarter of 2023, the company's net income, EPS, operating EBITDA margin, and SG&A expense results were adjusted to exclude certain items for better comparability. The call was recorded and will be available for replay on the company's website. The company's President and CEO, Jim Fish, credits the team's focus on increasing profitability and optimizing costs for the strong results, with adjusted operating EBITDA growing by 6% and margin expanding by 100 basis points. The solid waste business drove the company's strong performance, with organic revenue growth and robust price performance across all lines of business.

In the third quarter, the company saw positive growth in solid waste volumes and success in managing the middle of the P&L. They have been leveraging attrition and technology to reduce headcount and are on track to eliminate 5,000 to 7,000 positions over four to five years. The company's focus on price, efficiency, and cost control resulted in strong operating leverage. Their investments in sustainability, specifically in renewable energy and recycling, are also on track with several projects expected to be completed in the near future. Upgrades and new facilities are also in progress to improve recycling capabilities.

The company's automated network has resulted in lower labor costs and improved material quality, leading to strong financial results in the third quarter. The company is on track to meet its financial outlook for the year and is focused on cost optimization and price discipline. The team's commitment and contributions to the company's success are acknowledged. The operational results for the quarter show improvement in operating expenses and pricing leverage.

The company is pleased with their progress in managing labor costs and expenses related to repair and maintenance. They have seen a decline in inflation and have automated residential routes to decrease the number of helpers needed. They have also reduced turnover and improved collection efficiency. Progress has also been made in reducing repair and maintenance expenses through fleet replacement and reduced rental truck usage. The company is optimistic about ongoing improvements and is executing revenue management programs to recover costs and improve margins.

In the third quarter, the company saw 5.7% organic revenue growth in their collection and disposal business, driven by a 6.6% core price increase and a 5% yield in collection and disposal. The company's focus on maximizing customer lifetime value is reflected in their low churn rate of 9%. Landfill business drove most of the volume growth, with a 11.1% increase in special waste projects. The company's project pipeline remains strong, but the timing and pricing of these projects can be variable. MSW volumes were up 1.7% in the quarter, while overall collection volumes were down slightly due to intentional pricing strategies and lower volumes from the roll-off business. Despite this, revenue and operating EBITDA continue to grow in each line of business. Net new business and net service increases are positive, and the company's strategic accounts business is outpacing expectations. Overall, the collection and disposal business is on track for the year.

The third quarter results for our company were in line with expectations, with strong results from our automated recycling facilities and sustainability growth projects. Our operating EBITDA expectations for the year remain on track. Our focus on revenue growth and cost optimization has led to a 100 basis point improvement in operating EBITDA margin. SG&A costs as a percentage of revenue have also improved and are sustainable. Other margin impacts have balanced each other out, showing that our efforts to price services above inflation and reduce costs are paying off.

In the first nine months of 2023, the company has increased its operating EBITDA margin and generated strong cash flow. Despite challenges like higher interest and taxes, the company has maintained a high conversion rate of revenue to cash and operating EBITDA to free cash flow. Capital spending for the year is expected to be lower than previously anticipated, resulting in higher free cash flow. The company is confident in meeting its targeted free cash flow for the year.

In the first nine months of the year, the company has returned a significant amount of money to shareholders and has maintained a strong balance sheet. The company expects to meet its operating EBITDA guidance for the full year, but revenue growth may be slightly lower than initially expected due to lower revenue in the recycling brokerage businesses. The company remains focused on using technology and investing in sustainability for future success and is grateful for the hard work of their team. The call is now open for questions from analysts.

Bryan Burgmeier asks Jim Fish about the company's guidance for volume and EBITDA range. Fish explains that volume was as expected, with special waste slightly better and collection volumes flat. He notes that resi has been intentionally down, while commercial and roll-off have had mixed results. Landfill volume was as expected, with special waste and C&D being the only areas of note. Fish also mentions that C&D will be a difficult comparison in the fourth quarter due to last year's hurricane.

The speaker discusses the volume and EBITDA range for the fourth quarter of 2024, stating that there will be a natural level of conservatism due to current events. They also mention their plans to bring four or five RNG facilities online next year, which is in line with their original plan from January. They note that most of the construction delays in the CapEx line are related to recycling and it is too soon to speculate on facilities coming online in 2024. The speaker emphasizes the company's commitment to sustainability-related investments.

The company is confident in their ability to deliver projected EBITDA numbers for renewable energy and recycling in 2026. This is due to the expected construction of 40 projects in 2024, showing momentum within the platform. The company also notes that shifts in capital are related to both recycling and renewable energy, not just recycling. They also mention that unit cost inflation is starting to ease, with mid-single-digit inflation in the quarter, and they are considering core price increases for next year to offset this and reach a 29% margin.

In the third quarter, the labor drivers and technicians saw a decrease of 5-6%, leading to a moderation in inflation. The company has also seen progress in maintenance and repair expenses, with a decrease from mid-teens to low double digits and now to 6-7%. The company's pricing strategy is working, as seen in margin and EBITDA improvements in all lines of business. In Q3, core price covered cost inflation by 100 basis points, a significant improvement from the negative 500 basis points in Q1 and negative 250 basis points in Q2.

The speaker discusses the progress of the company in terms of pricing activities and cost optimization efforts. They hope to see an increase in margin expansion in the third quarter. The speaker then shifts to a question about the EBITDA contribution from RNG and recycling in 2024, but the company prefers to focus on the $740 million number for modeling purposes. They mention delays in capital spending and permitting, as well as challenges with supply chain.

The speaker clarifies that the numbers given were not intended to be guidance and that the company prefers to wait until February to give guidance due to the uncertainty in the current market. They also mention that some of the deferred capital from 2023 will roll into 2024, but some may also move into 2025.

The speaker discusses the difficulty in projecting the impact of a $350 million investment on the company's 2024 revenue, due to potential shifts in projects. They emphasize the importance of managing working capital and paying for capital when it is placed into service. The speaker also mentions the sustainability of current SG&A levels, stating that 9% of revenue is a reasonable estimate for the future. They attribute this success to technology, customer engagement, and cost discipline. The speaker also mentions the reduction of 5,000 to 7,000 positions through attrition, with 1,650 already eliminated. Most of these positions are in SG&A roles.

The company is aiming for a 5% to 7% increase in efficiency, mostly through reducing operating expenses. They have already eliminated positions in the customer experience department and plan to continue with automation and route optimization. The delays in sustainability capital spending have mostly been due to issues with utility interconnects and supply chain, but progress is being made.

The company has been working hard to ensure that they have agreements in place for the electrical and gas connectivity required for their renewable energy business. They have also made progress in obtaining necessary permits for their RNG side. From a supply chain perspective, they have done a good job in securing equipment for their recycling and renewable energy business. The single biggest plan, Fairless in Pennsylvania, has been pushed back a couple of months but the company is still on track to have 40 active recycle and RNG plants by 2024. There may be some effect on CapEx but the company is confident in their end goal for 2026.

Jerry Revich asks about the potential for lower repair and maintenance costs for the company. Devina Rankin explains that the company has seen a decrease in repair and maintenance costs in the third quarter due to the delivery of new trucks, but it's uncertain if there will be a decline in spending going forward. The company is still catching up with getting the right assets in place to service customers.

In the first half of next year, the company expects to see a flatter cost in repair and maintenance due to the use of newer trucks. This is also improving efficiency in other areas of the business. The company is still following their allocation plan for gas usage, with a focus on transportation and the voluntary market. They have also made a 20-year deal with a large utility at a price of $20 per MMBtu.

In the third quarter, the company saw a 29.6% EBITDA margin, slightly higher than their target of 29%. This was due to their efforts in managing the middle, specifically in terms of labor and equipment availability. Labor turnover is currently stable, and there are some upcoming collective bargaining costs that may impact labor trends. However, the company remains positive about pricing going forward.

John Morris and Jim Fish discuss the company's spending on collective bargaining and their labor costs. They mention that they have seen a moderation in rate inflation and a decrease in turnover, particularly with drivers. The company is focused on controlling what they can and expects pricing to continue to be good in the future. They also feel confident about their progress in reducing operating expenses.

The company is pleased with its progress on reducing SG&A costs and is attributing it to technology investments. They also mention challenges from the pandemic affecting turnover and supply chain, but they have addressed these issues. They anticipate a similar year in 2024 with flat volume, good pricing, and positive comps in their sustainability and RNG businesses. They are focused on controlling what they can and are seeing benefits in truck deliveries.

John Morris and Devina Rankin discuss the impact of the UAW strike at Mack on investor questions. They state that there are built slots opening up for 2024 and that truck deliveries are expected to continue strongly. They also mention that the strike will not have a significant impact on their supply chain and that they are in good shape. Stephanie Moore from Jefferies asks about the 100 basis points of margin expansion and Devina Rankin explains that it is mainly due to optimizing the cost structure in collection and disposal, with SG&A also contributing. Other factors such as fuel, ITC, and M&A also had an impact, with the timing of the alternative fuel tax credit being a headwind of 50 basis points. However, lower fuel prices and surcharge structure helped offset this. Recycling and renewable energy also had a small impact on the margin expansion.

The company expects a decrease in the dilutive impact of M&A in the third quarter compared to the first half of the year. They also have strong pricing power in all lines of business and 40% of their restricted book is tied to an index, which is expected to have a positive impact on pricing.

The speaker discusses the net price and how it has changed in the past year due to inflation. They mention that in the second quarter of 2022, CPI was higher than their core price for collection disposal, but now the tables have flipped. They believe they are on a good trajectory for margin growth, and that the current level of inflation is closer to an optimal level. The other speaker adds that customer metrics are also on a good trajectory. The final question is about productivity and efficiency gains as labor turnover improves.

John Morris discusses the friction points of turnover and how it can affect safety and efficiency. The positive momentum in efficiency has continued into October. Dave Manthey asks about the $350 million sustainability CapEx and whether it has been cut or just pushed back. Tara Hemmer confirms it has not been cut and will be spread out over 2024 and 2025. Dave Manthey also asks about the constant conversion rate of 11.72 D3 RINs per MMBtu and the percentage of floating rate debt, which are 9%.

In July, Devina Rankin announced that the company had secured strong fixed rate debt at a coupon of 4.875%, which was a favorable timing given the current 10-year treasury rates. The next question from Brian Butler focused on the pricing side, specifically the spread over inflation. Jim Fish explained that the spread had been negative in the first half of the year but had turned positive in the third quarter due to declining inflation rates. He hoped to maintain a slight advantage over inflation in the future, as the company's own inflation does not necessarily track with CPI.

The speaker discusses the company's progress in reducing labor inflation and increasing productivity. They mention the need to reach a 5-6% price range for the next year and the potential for even better results in 2024. They also mention the efficiency and productivity gains from converting to automated side loaders in their residential line of business.

The speaker is discussing the sustainability deferred spending and how it is not affected by market prices. They are moving forward with 40 projects and have various cost containment programs in place that differentiate them from their competitors. They believe that these cost improvements will also lead to top line growth, particularly in the national accounts business.

The speaker discusses the importance of comparing their 29.6% margin in the quarter to their largest competitor's margin of 31.1%, which demonstrates the strength of their process improvements and price execution. They also mention that churn is at historical lows, and they are focused on customer lifetime value rather than pushing prices too high. They have been successful in growing their national account business and had their best ever disposal core price in the third quarter.

The company has seen a 9% increase in pricing for new business in the disposal sector, indicating strength in that area. They are also focusing on pushing price and maintaining margins in residential and transfer station lines of business. They have been less active in M&A and have instead focused on share repurchases due to high interest rates and economic uncertainty.

The speaker discusses the company's plans for M&A and capital allocation, stating that they are not interested in competing based on future forecasts. They also mention the balance sheet and investments as part of their M&A strategy. A question is asked about the average yield guide for 2023 and the potential for a big step-up in the fourth quarter.

Devina Rankin discusses the company's expectations for its fourth quarter yield to be in line with the previous quarter and to reach the targeted 5.5% for the full year. She explains that the trend seen in the third quarter is not indicative of a long-term trend, but rather a result of mix and hurricane impacts. She emphasizes confidence in the ability to deliver the targeted yield. In response to a question about RIN pricing, Tara Hemmer explains that the market for RINs is evolving quickly due to the increase in renewable natural gas and EPA's three-year RVO. The last question on the call is about the commercial sector, which is described as encouraging.

The speaker is asked about their expectations for 2024 in terms of volume, specifically in the commercial, residential, and industrial sectors. They mention that they are most optimistic about the commercial sector due to their successful national accounts business and potential for growth. They also mention that residential volume may continue to be negative due to efforts to eliminate unprofitable work, and that the roll-off sector is dependent on the economy and therefore difficult to predict.

The speaker, Jim Fish, is optimistic about the company's future and believes the next quarter will bring more clarity. He thanks the audience for their questions and wishes them happy holidays. The conference call has now ended.

This summary was generated with AI and may contain some inaccuracies.