General Dynamics Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2022

There are 16 speakers on the call.

Operator

Welcome to the WM's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer And please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Eagle, Senior Director, Investor Relations. Please go ahead.

Speaker 1

Thank you, Lori. Good morning, everyone, and thank you for joining us for our Q1 2022 earnings conference call. With me this morning are Jim Fish, President and Chief Executive Officer John Morris, Executive Vice President and Chief Operating Officer and Devina Rankin, Executive Vice President and Chief Financial Officer. You will hear prepared comments from each of them today. Jim will cover high level financials and provide a strategic update.

Speaker 1

Gerard will cover an operating overview and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8 ks this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8 ks, the press release and the schedules of the press release include important information. During the call, you will hear forward looking statements, which are based on current expectations, projections or opinions about future periods. All forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10 ks. John will discuss our results in the areas of yield and volume, which, unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. Any comparisons, unless otherwise stated, will be with the Q1 of 2021. Net income, EPS, operating EBITDA and margin and SG and A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non GAAP measures and non GAAP projections.

Speaker 1

This call is being recorded and will be available 24 hours a day beginning approximately 1 p. M. Eastern Time today until 5 p. M. Eastern Time on May 10.

Speaker 1

To hear a replay of the call over the Internet, access the WM website at www.wm.com. During the telephonic replay of the call, dial 855 859-two thousand and fifty six and enter reservation code 3,365,157. Time sensitive information provided during today's call, which is occurring on April 26, 2022, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of WM is prohibited. Now I'll turn the call over to WM's President and CEO, Jim Fish.

Speaker 2

Thanks, Ed,

Speaker 3

and thank you all for joining us. The Q1 of every year sets the tone for the rest of the year and our Strong first quarter results really set us up for success in 2022. We delivered exceptional core price and yield results, grew profitable volumes And managed our costs. The result was double digit growth in revenue, operating EBITDA and cash from operations. In fact, our cash from operations was the highest we've ever generated in a quarter, allowing us to return $500,000,000 of cash to our shareholders.

Speaker 3

Our operating EBITDA margin of 27.6 percent was ahead of our plan even in the face of record inflation and the delayed approval of the alternative fuel tax So we executed extremely well in the Q1 and achieved better results than we anticipated positioning 2022 to be another great year for WL. In addition to the strong start in the Q1, we see signs that the economy is trending positively. Several of the key leading performance indicators within our business such as special waste volumes, construction and demolition volumes and new business formation pointed to continued strong economic activity and business performance for the balance of the year. The positive economic activity combined with WM's diverse customer base, the recession resilient nature of our business And nearly 75% of our revenue that is annuity like gives us confidence to reaffirm the full year outlook we provided in February. As we progress through the year, we remain committed to executing on our strategic priorities of providing the best workplace, Advancing technology and automation that differentiates WM and reduces costs and leveraging our sustainability platform for growth.

Speaker 3

Turning to our sustainability and technology investments. We're excited about the future. We see the opportunity to further our sustainability leadership by expanding recycling capacity, automating recycling processing and increasing the renewable energy generated from our landfill network. We opened a new recycling facility in the Q1 and we're on track These projects are expected to generate excellent returns that are superior to those of solid waste acquisitions. Regarding technology, last quarter you heard us Discuss cost saving opportunities for automation and optimization, which involves creating a competitive advantage for WM by differentiating the customer experience while reducing our labor dependency on certain roles.

Speaker 3

Through our focus on digital technology, we anticipate reducing 5000 to complete sense to use technology to reduce our dependency on certain high turnover jobs. In addition to tackling this attrition, Technology produces a significant amount of data that we view as a valuable asset. John has referred to our trucks as rolling data centers And we're using that data and analytics to create a sustainable competitive advantage. Currently, we're piloting the full end to end optimization of our roll off routes, which will be the first of its kind in the industry. Early efficiency results in our pilots are very encouraging And our plan is to have our roll off routes fully optimized by mid-twenty 23.

Speaker 3

Finally, while we use automation and data to our advantage, To sum it up, we've set the bar high in our Q1 with our results and we're confident in our ability to deliver strong performance Throughout the remainder of 2022, I want to thank the entire WM team for their hard work and dedication. I know that they continue to work to deliver on our commitment to our customers, our communities and our shareholders, And we very much appreciate that. I'll now turn the call over to John to discuss our operational results for the quarter.

Speaker 4

Thanks, Jim. Good morning, everyone. 2022 began on a high note with 1st quarter organic revenue growth in the collection and disposal business topping 9%. Our expectation was that the Q1 would be our strongest quarter of the year both for pricing and volume growth and our teams delivered revenue that exceeded our expectations. Core price of 7.3 percent is more than double the result for the same quarter in 2021 as we work to secure price increases that keep pace with the inflationary environment.

Speaker 4

Strong pricing results across all lines of business translated into collection and disposal yield of 5.5% with standout performance of 7.9% for commercial and 5.1% for landfill MSW. We remain confident that our pricing strategies appropriately respond to the rising costs and prioritize our focus on maximizing customer lifetime value. Shifting to volumes, 1st quarter collection and disposal volume grew 3.8%. Landfill volumes continue to be strong with MSW volumes increasing more than 5% And special waste volumes growing almost 30% in the quarter. And while we expect some moderation in special waste volumes Our first quarter levels, our project pipelines remain strong.

Speaker 4

Also contributing to our strong volume results was significant growth in our national account business. In the Q1, our strategic business solutions team won more than $20,000,000 of new annualized revenue. These wins were driven by our ability to meet customer Our teams remain focused on controlling operating costs. Overall, adjusted operating expenses were 62.3% of revenue in the 1st quarter. While cost inflation in the Q1 persisted in the high single digits, our operating costs improved 70 basis points from the Q4 of 2021, largely due to encouraging trends in our largest cost category, labor.

Speaker 4

1st quarter overtime costs and training hours On a year over year basis, the increase in operating expenses as a percentage of revenue primarily comes from 3 areas: 50 basis points in our collection and disposal business related to inflationary pressures, including the proactive and intentional steps we took last year To increase wages for frontline team members, 40 basis points from the impact of higher commodity prices on our recycling brokerage business and 30 points related to the alternative fuel tax credits received in 2021 that have not yet been renewed for 2022. When we think about the balance of the year, we expect the inflationary cost pressures to ease in the second half of twenty twenty two as we lap acute inflation that began in the second half of 2021. We do anticipate some pressure on maintenance costs in 2022 as a result of delays in our truck delivery schedule resulting from ongoing supply chain Turning to our residential collection business, we continue to execute on our long term plan to improve this line of business through pricing and automation. The impacts of higher labor costs are most pronounced in this part of the business and we are focused on appropriately pricing our contracts and reducing our costs by transitioning more of our residential fleet to automated single driver vehicles.

Speaker 4

Our first quarter revenue growth results reflect our success in moving residential Pricing as our yield was 5%. In our recycling line of business, we delivered another strong quarter with operating EBITDA growing by $23,000,000 Our blended average commodity price in the Q1 was about $126 per ton, which is in line with our full year expectations. We continue to see strong demand for recycled materials, and we remain focused on educating customers to help unlock additional supply of recyclables and employing technology to maximize the value of the material recovered while reducing our cost of processing. Finally, our Renewable Energy business contributed an additional $13,000,000 of operating EBITDA in the quarter. We have a new renewable natural gas plant coming online in the In closing, I want to thank the entire team for the fantastic job they do safely and reliably serving our customers day in and day out.

Speaker 4

We had a great start to 2022 and look forward to building on our success. I'll now turn the call over to Devina to discuss our financial results in further detail.

Speaker 5

Thanks, John, and good morning, everyone. Our disciplined pricing programs, robust volume growth and solid recycling performance fueled strong top line growth And that translated into a nearly 11% increase in operating EBITDA in the Q1. Our operating EBITDA growth completely slowed related primarily to higher incentive compensation payments in 2022 for our strong 2021 performance. We're pleased with these strong results and are well positioned to comfortably deliver on our full year outlook. Turning to capital expenditures.

Speaker 5

1st quarter capital spending to support our business totaled $371,000,000 and we invested an additional $47,000,000 Given our acceleration of sustainability growth in the Q4 of 2021, We spent a little less capital on these investments in the Q1, but we remain on track to advance these projects in 2022 as planned. We expect that our investments in recycling and renewable natural gas projects will ramp up as we move through the balance of the year. While we continue to see supply chain constraints, slow delivery schedules in some asset categories, we're managing spending across our portfolio and expect and sustainability growth investments to be approximately $550,000,000 in 2022. As you heard from Jim and John, our Our teams are executing on the recycling and RNG growth projects we discussed last quarter, and we're confident in the strong returns these projects provide. Keep in mind that these investments are reported as a component of our capital expenditures and reduce our traditional measure of free cash flow.

Speaker 5

Yet we view these investments to be similar to an acquisition dollar as they produce high return growth as a strong complement to our existing business. Putting it all together, our business generated 1st quarter free cash flow of $845,000,000 Before sustainability growth investments, 1st quarter free cash flow was $892,000,000 which puts us well on our way to achieving our full year outlook of between $2,600,000,000 $2,700,000,000 We are well positioned to allocate our cash to sustainability growth investments, traditional tuck in acquisitions and growing shareholder returns. We used our free cash flow to pay $275,000,000 in dividends in the quarter And we allocated $250,000,000 to share repurchases, while maintaining our leverage ratio well within our targeted range. Turning to SG and A, we remain focused on controlling discretionary SG and A spending and leveraging technology investments to reduce Cost of our sales and back office functions. 1st quarter SG and A was 10.1 percent of revenue, a 60 basis point improvement over 2021.

Speaker 5

We fully expect to achieve SG and A as a percentage of revenue of less than 10% for the full year, even as we continue to invest in technology to differentiate WM and lower our cost to serve. And

Operator

And our first question comes from the line of Toni Kaplan of Morgan Stanley. Your line is open.

Speaker 6

Just given the strength we saw in Q1, Just hoping you could add any additional color on why not raise the guidance. I know you said it puts you in Really good place for reaching the full year guidance, but is it the supply chain issues or uncertainty just in the macro? Just I want to understand some of the drivers there.

Speaker 3

I think, Tony, last year was actually a little unique for us. I think it was the 1st year we've ever raised guidance in 1st quarter. And so we didn't want to set a trend necessarily. I think we felt like The quarter was fantastic, sets us up well for the year. But before we would change that outlook, we wanted to get another quarter or 2 under our belts.

Speaker 6

That's great. I want to also ask about on the labor side, just an update on What you're seeing in the labor market, maybe churn, and just wanted to ask if there's sort of In terms of the projects that you're implementing, any sort of impact on like delaying those projects because of the tight labor market?

Speaker 4

No, Tony. We've seen some increases in overtime, which honestly moderated over the last couple of quarters. So that's good news. We've Been successful in bringing down our turnover numbers. They're not where we want them to be, but they're about 300 basis points better than they were 2 quarters ago.

Speaker 4

So we're seeing good trends overall on the labor front. We were, to some extent, paying a little bit of a premium to service some of that business few quarters ago, the overtime was up, but the good news is that it's moderating. Our overtime percentages are coming down. Our retention rates are better. So we feel pretty good about where we are in our ability to service And these volume opportunities that present themselves.

Speaker 5

And then Tony, with regard to our focus on labor To advance the projects that we've discussed in sustainability and recycling, one of the things that's unique about WM is that we started this journey with a really From team that's been developing these projects over the last several years and we're leveraging that team and building it where appropriate in order

Speaker 6

That sounds great. Maybe just one last Same for me. Core pricing looked really good in the Q1. When you think about sort of The ability to offset inflation seems like that should be able to do it. Can you go beyond offsetting inflation?

Speaker 6

And when do you see core pricings

Speaker 3

Yes. Look, I would tell you for the quarter, we were pleased with the results from a price perspective, So you shouldn't expect to see the same raw numbers in Q3, Q4 Because of the difficult comparisons, but we certainly have, I think, shown that we're pretty effective at using price to cover our The cost inflation. I think it's also important that we focus on the cost side of the business, and that's why we're starting To really talk a lot about technology, I mentioned this 5,000 to 7000 jobs that in a low cost way, Meaning, we use attrition to take them out. That will be a significant contributor as we go down the road. So we're not just Relying solely on price to improve margins, some of it has to come from the cost side of the equation.

Speaker 6

Terrific. Thanks so much and congrats again.

Speaker 5

Thank you.

Operator

Thank you. And our next Question is from Jerry Revich of Goldman Sachs. Your line is open.

Speaker 2

Yes, hi, good morning. And yes, I'd love to continue the discussion on If you don't mind, really impressive performance. I'm wondering if you can talk about whether you folks went back Customers that had a price increase within the past year. With the second price increase or is the acceleration that we're seeing an upside versus the original expectations driven by higher pricing on contracts that are rolling? Thanks.

Speaker 3

Yes, Jerry, I'm not going to say that there isn't a single customer out of our $25,000,000 that didn't get 2 price increases, but we've really, really tried To move away almost completely from that, and I hope that there aren't any. But what we're trying to do is When we take a price increase on customers, make it an annual thing. And so I can't say with 1,000 percent confidence that Something didn't slip through the cracks, but I would tell you that that's that may have been a practice from years ago, but that practice has changed. So that Pricing is more of an annual item for our customers.

Speaker 2

That's So it sounds like the leading edge pricing is probably a couple of points even higher than the strong core price. And in terms of the landfill gas cadence, can you talk about as the RNG plants Come online, is there a ramp up period to get to full production and full efficiency? How quickly relative to the timelines that you Hi, Jim. Can we expect the full run rate earnings contribution?

Speaker 4

Yes, Jerry. I mean most of those plants have infrastructure in place already. So we're managing that gas. In most cases, the difference is we're switching over from the technology we were using to manage gas to an RNG process. So Once the plant's up and we've kind of knocked the kinks out, if you will, it comes up to speed fairly quickly.

Speaker 4

None of these are landfills where we're starting with no

Speaker 5

And Jerry, just to put a fine point on how we're thinking about the Build of financial value from these plants, our 2022 guidance did contemplate these Two facilities that we're bringing online in 2022. And because of the timing of bringing them online, it really did have a

Speaker 2

Super. And I'm wondering if you folks will be willing to tell us the timing of additional plants coming online in 2023 with the type of precise schedule that you laid out for 2022 at this point?

Speaker 5

At this point, it's too early for us to give you those details. We are actively pulling in the equipment and the permitting processes. And Because of the uncertainty in those processes, we just can't predict at this point with the same level of certainty that we've given you for 2022, What we expect in the year ahead, but as we get closer to those dates, we certainly will.

Speaker 2

Super. Thank you.

Operator

Thank you. And our next question is from Hamzah Mazari of Jefferies. Your line is open.

Speaker 7

Hey, good morning. Just in terms of pricing, do you have a sense of what percent of your Actually pushed back on pricing because pricing in this sector from 'nine to 2012 was Very, very low, 1%, 1.5%. And maybe the sector found discipline, maybe 2015, And it's a small ticket cost item. So is it 5% that pushed back or 10%, 20%? Just any sense of that would be helpful for investors.

Speaker 4

Yes. So I can't speak to the sector. What I can tell you though is a couple of those metrics we pay close attention to. 1 is churn, which in my comments I said is still at near historic lows. We haven't seen really a lot of movement there even when you look at the Pricing that we posted for the quarter, we look at service increases and decreases also a measurement of the health And those continue to be positive in a big way.

Speaker 4

And then lastly, the metric we look at is rollbacks and I will tell you that rollbacks are much Stronger year over year. So even as we've addressed this and I think we all agree that customers understand that there is real inflationary pressure and I think that's That coupled with the value in terms of service we're delivering is the reason why you're seeing rollbacks even lower despite us having pushed through more on the revenue quality side.

Speaker 7

Got it. And then just lastly, I'll turn it over. I guess, do you have a sense of This is as it relates to the sustainability investments, does that create more volatility in your portfolio or less volatility? I know the recycling piece you talked about sort of more of a cost takeout. But I guess on the landfill side, landfill to gas I guess, have you made a decision on fixed price versus kind of lever to the RIN market?

Speaker 7

Just any thoughts as to Volatility in the portfolio of some of the investments, is it less or more? Thank you.

Speaker 5

It's a great question, Hamzah, and one that we're focused on internally in terms of how we'll manage this over the long term as this becomes In terms of how we'll manage this over the long term as this becomes a larger part of our business, volatility in the natural gas Business will certainly increase relative to the traditional solid waste business. That volatility though only comes from the top line of There really is no volatility in the middle of the income statement. And so for us, it's about how we evaluate Every vantage point of the revenue life cycle and think about what we're exposed to in spot markets and what we can secure long term contracts for. And we are currently addressing some long term contracts. We've discussed the fact that some of those are extending beyond even 10 years at this point.

Speaker 5

We want to ensure that while we consider long term contracts, we don't somehow diminish the return of the portfolio because we are making sizable investments We want to be sure that we're appropriately balancing ourselves between spot markets and the long term to maximize the returns.

Speaker 7

Thank you.

Operator

Thank you. And our next question is from Michael Hoffman of Stifel, your line is open.

Speaker 8

Hey, Houston. Thank you for taking the questions. So To come back to the pricing, which was terrific, and you stood up and delivered on what you said you were going to do is just get in the market and do it aggressively to make up for 2021. Just to remind us all, your once a year objective is on contract renewal cycles, not just once a year at a point in time. Is that correct?

Speaker 3

Yes, that's right.

Speaker 8

Yes, okay. So there's a rolling effect of price all year long. It's just you're not intending to come out of customer more than once is the objective.

Speaker 3

Well, that's right. And I think the point about the price increase being once a year is that There may be some price that's still on the table out there because we didn't take price increases as aggressively in March of last Here or in April of last year. So those will come around. I mean inflation didn't really kind of hit us hard until Q3. So you will see Some pickup there that we didn't choose to take even though that customer may have The cost for servicing that customer have increased dramatically in Q3, Q4.

Speaker 3

Their price wouldn't have mirrored that until we get to The anniversary of this year.

Speaker 8

Right. And then I fully agree and appreciate that not raising guidance now allows For the normal seasonality that occur and the like. But when I think about what you did give you in guidance, 5.5% in core and 4% on price, 2% on volume. The 1Q numbers are how much Above your own expectation were they comparatively, the 7.5%, the 5.5%, the 3.6%. How much did you exceed your own expectations?

Speaker 5

So on the price side, I would tell you, our expectations had been, when we set our guidance that we would See stronger price performance and volume performance in the first half of the year than the second half of the year simply because of the year over year comps. We continue to see that math hold and that therefore means that as we look Both the guidance we established and where we are today that we expect Q1 to be the peak, I would say, in terms of the on core price and on yield. That being said, if I look purely at the numbers, I would tell you we were about 100 Basis points maybe a little higher than that, above our expectations on core price. On the volume side, They were stronger than expectations, particularly in special waste. The rest of the business really performed according to plan.

Speaker 3

Well, I think commercial It was very strong too on the volume side. I don't know

Speaker 5

It was. It was just generally speaking in line with what we would have projected We're really optimistic that the commercial volume strength continues. But as John remarked earlier, The special waste volumes is one of the things that we have our eye on because approaching 30% increase on a year over year basis certainly isn't something that we had predicted.

Speaker 3

Michael, sometimes we talk a little bit about what the current month looks like and we're not seeing anything that would change our view right now in April.

Speaker 8

Fair enough. And just so everybody is looking at data, the $148,000,000 of volume versus the which is like 3 point 5 Versus the almost 8% landfill volume increase. The difference there is that there's a huge chunk of special waste And that almost 8% landfill volume year over year number.

Speaker 3

Yes. There was definitely special waste was a strong But the great thing about the quarter, if we're really focusing on just kind of this short term quarter and then the remainder of the year, Is that we kind of had universal strength and I'm not sure we've had a quarter like this where virtually everything Looked good. I mean even C and D, you might look at C and D and say, well, that was flat. But if you look at last year with all the fire and flood volume in it, If you pull that out, C and D was really strong on its own. So whether it's MSW volume or commercial volume or special waste or C and D, Everything looks strong.

Speaker 3

We are keeping our eye on the macro economy because there's a lot of chatter out there about that. But we're not seeing any signals right now in those forward looking waste streams that would indicate that there's big downturn And believe me, we're looking at it. Nothing shows up right now.

Speaker 8

Okay. And then the fuel the industry fuel Surcharges, they're very good at it. We had a big spike in March. Can you help us get this right instead of guessing? What should we be modeling for that dollar change for the 2nd quarter based on what happened in coming into 2Q.

Speaker 8

You did $90,000,000 in surcharge in 1Q. It's got to be bigger, but what's the right place to be?

Speaker 5

A quick clarification on the $90,000,000 on the fuel surcharge line. It's important to know that that also includes Renewable energy pricing, so the fuel surcharge was about $70,000,000 of the $90,000,000 That being said, March was about 45 And so the ramp that you mentioned was significant and we continue to Expect that will persist through the remainder of the year. Our prediction right now is $90,000,000 to $100,000,000 per quarter.

Speaker 8

Okay. All right. That's terrific. And then, since you alluded to the cadence, Devina, on CapEx, can you give us a little framing of how we should land that To get the free cash flow per quarter kind of close to right since it's such a big number that's left?

Speaker 5

John did a great job of talking about the supply And so while we would love to give you some clarity on the cadence of capital for us right now, it's Just more difficult for us to predict quarter by quarter, particularly for Truck Capital where we're seeing delivery schedules lengthen. I would tell you Q2 is usually the point in time that we start to see ramp, particularly in the landfill line of business. And so you'll see that I do expect Q4 to be a pretty heavy capital quarter again though for us. So, I think you can take our guidance For each of them and make it pretty ratable over Q2 through Q4.

Speaker 8

Okay. And then you shared with us last quarter your second half of the year, Internal cost inflation kind of ran at 6% and 7%. What were we running in the Q1?

Speaker 5

It was closer to 9%.

Speaker 8

Wow. And is it coming down?

Speaker 5

No. We think that this is effectively the peak and we expect it to plateau. And then as we discussed, We expect to see some moderation in the back half because we'll lap the labor increases that we executed upon beginning in the third Quarter of 2021.

Speaker 8

Okay. And then last one on the renewable energy side, you have shared that your objective is to try and That stability on the profit line through the long term contracts. The big change here is that we're moving away from a transportation buyer to a non transportation buyer, and have you gotten more than indications of interest that they really are willing to pay a sustained premium? And I'm not talking current market rate, even just something higher than the long term average of what the RIN has been to create that Stability on the profit line?

Speaker 4

Yes, Michael. We've executed a handful of contracts to be incommated. 1 was around the 10 year mark, 1 was a little longer than that. And the short answer to your question is yes. It's a small percentage The gas we produce now, we're going to continue, as Divina said, to look to stabilize the portfolio by putting a portion of those Contracts in a fixed position, but the short answer is yes, people are willing to buy and yes, they're willing to pay a premium on an MMBtu basis.

Speaker 8

And it's a non transportation buyer, it's utilities, it's institutions, it's property management. Non transportation. Right. Last question, Devina. You've shared in the past that the ramp in the contribution is modest in 2023, a little more in 2024 and then it really moves up in 2025.

Speaker 8

That pattern has not changed, right, in light of one of the earlier questions?

Speaker 5

Yes, that's correct, Michael.

Speaker 8

Okay, great. Thank you very much. Good luck for the rest of the year. Nice start.

Speaker 9

Thank you.

Operator

Thank you. And our next question is from Walter Spracklin of RBC Capital Markets. Your line is open.

Speaker 10

Yes, thanks very much. Good morning, everyone. So If we go back to the volume, you mentioned special waste and even commercial coming in a little bit better than trend. We seem to be fairly through the recovery phase and yet you still are putting up some pretty good volume numbers. Historically, we've always looked at waste as kind of a few demographic aspects and urbanization and so on being offset by some diversion and Net net looking at overall a flat volume cadence over the long term and really pricing Being an opportunity, is that changing now?

Speaker 10

When you look at your volume trajectory here and the continued growth you're Seeing in volume, is there anything structural that you think is going on right now that you think will have longer term impact In terms of perhaps positive volume growth going forward?

Speaker 3

I think what structurally is changing versus maybe previous quarters is that we're starting to really separate ourselves, I believe, from the pack. So it's not just driven by micro and macroeconomics. It's driven by the fact that WM is we don't tend to on these calls talk a lot about Kind of short term, the outlook and what the quarter look like and what the remainder of the year is going to look like. But we also tried to inject in a bit of what we're doing And I would tell you, Walter, we're making huge strides in digitalizing our customer service. It's something the airlines did years ago and now we're doing that.

Speaker 3

And it's separating us from a lot of others in the industry. We believe we're taking share and I believe that's part of what you're seeing in the volume picture. I can't break it out for you by line of business. But as we do that, and we believe that's kind of a 3, 5, even a 10 year strategy, similar to what we're talking about with Sustainability, there's an awful lot of customers out there that are talking to us about data and analytics for their own sustainability initiatives. Is not just about Micro101.

Speaker 3

This is about not only microeconomics, but it's also about the strategy we're putting in place that I believe is absolutely taking share and will take more share as we further differentiate ourselves down the road.

Speaker 10

I think if that's true, you would probably see it in the special waste and commercial areas, which is where you are indeed seeing the strength. So

Speaker 3

That's absolutely right. I mean, look, the short story is that's why I'm so bullish on this company. Obviously, I'm biased, but I got to tell you, I mean, I'm really bullish on it. Even at $160 I mean, it's the strategy to me, whether you're talking about The brand that can't be matched, the labor the reduction of labor dependency, which doesn't Addressed the volume aspect, but addresses the cost aspect and using the digitalization customer experience And to help us reduce our labor dependency by 5000 to 7000 jobs hasn't gotten a lot of comments From investors, but that's a big deal. And so all of that, I think, helps separate us from others who just simply can't replicate that.

Speaker 10

Great points. Turning now to M and A, one of your competitors obviously Has moved a little bit outside of pure solid waste into a little bit hazardous and there's been some discussion or rumor out there that you may do the same. Without you Commenting on that, is that something conceptually that's in the cards for you or solid waste kind of Your singular focus for M and A opportunities?

Speaker 3

Yes. I mean, look, we've seen the rumors. And I would tell you this, we're Just as I went through with you kind of our strategy, which is really an organic strategy, we're really pleased with the results of our organic strategy. And at the same time, We'll continue to look at some of the small tuck ins. We may do something that's an adjacency.

Speaker 3

We've talked about those as well that are related to our Sustainability strategy, and that's probably where we draw the line as far as M and A goes. I will tell you That in my view, there are reasons today to be conservative when it comes to M and A. It goes back to what I said about us being differentiated. Some of these other haulers, by the way, some of them are talking to us that have Pressures on driver and technician turnover, significant pressures on driver and technician turnover that are absolutely seeing wage inflation. They're having a difficult time getting capital equipment probably times 2 versus where we are and they don't have a sustainability service offering Those are reasons to not go out and pay a big heavy multiple to acquire some of these folks.

Speaker 10

Very good points. I appreciate the color and congrats on a great quarter.

Speaker 11

Thank you.

Operator

Thank you. And our next Question is from Tyler Brown of Raymond James. Your line is open.

Speaker 9

Hey, good morning guys.

Speaker 4

Good morning.

Speaker 9

Hey, Devina, I may have missed it. But I was hoping you could just give us a little more color on the 70 basis point decline in margins. Just thinking about some of the puts and I'm thinking about things like fuel, commodities, maybe the tax credits, maybe that would have influenced the year over year because with 9% core inflation and call it a 5% to 6% yield, were core margins down?

Speaker 5

So it's really interesting when you look at the margin of the quarter, it certainly outperformed our expectation and that Started at the top line and continued through in terms of managing costs, which John mentioned earlier, particularly on the labor side. I think what's important is that you normalize for the fuel tax credits first because that really gets us focused on the rest of the business and how it performed. And that was 30 basis points. And so when you look at Q1's performance and you can see that we We're only down 30 basis points on a year over year basis and that compares to our expectation that we'd be down about 100 basis In the first half, we're certainly very pleased with that performance. The overall puts and takes just to build the bridge Is that I would tell you the positive drivers from a margin perspective in the quarter were 20 basis points from the Renewable Energy business, About 10 basis points for leverage on SG and A beyond expectations.

Speaker 5

Recycling, this is the brokerage business. It's led by the brokerage business. It includes all elements of the But what's really important to highlight there is it sequentially improved 50 basis points when you remove the impact of the fuel tax credits. So we're really pleased with that performance and it outpaced our expectations. We still remain cautious about margin in the first half of the year relative Prior year because as a reminder, Q2 of last year was, I believe, an all time high at 29.3%.

Speaker 5

So we still expect margins in the first half to be on a year over year basis, a more difficult comp and therefore a decrease, But we expect the margin momentum that we began in the Q1 to continue throughout the year.

Speaker 9

Okay. So that leads me to my second And so it's still going to be soft, it feels like in the first half. I don't want to put you too much on the spot, but do you think that margins can still improve For the full year despite the dilutive impact from fuel. And I'm thinking that fuel is maybe an extra 50 basis points of dilution, But I don't know if that's in the right zip code.

Speaker 5

So I'm going to separate fuel tax credits and the impact of rising fuel costs. The fuel tax I would tell you we hope it's a timing difference. Our outlook right now is that, that 30 basis points may continue And we would love to see resolution sooner rather than later, but we think it could go all the way through the Q4. But we do expect that timing issue only, not contribute to the margin of the business overall. From a diesel fuel rising cost perspective, We certainly saw that impact in the Q1 and like I said earlier, it ramped in March.

Speaker 5

We estimate that the impact of that for every dollar change in diesel fuel is about 20 basis points of margin pressure.

Speaker 3

So Tyler, to my previous point to Walter about margin, There seems to be a real focus on pricing, which is the right focus. But when you think about margin, there's a cost aspect And then so just to give you a couple of examples, we fully expect That with the digitalization of our customer experience, for example, that we have built into our plan that we won't Rehire some customer experience positions, talked to Mike Watson about this morning. And so we've built that into our plan, probably as many as 300 positions that won't rehire when they are tread away. So this isn't laying anybody off. This is just saying when we have And calls come through our call centers that are asking for ETA or asking for status of a payment Or a bulky pickup, those have fully been automated.

Speaker 3

And so we've agreed that we won't replace those positions. And that amounts to somewhere in the neighborhood of 300 positions for the year that we built into our plan. Similarly, with this move from rear load to ASL, We think there's as many as 2,000 of those that over the next 4 years come out and so you get A helper on the back of the truck that comes out, but you also get, and we know this from experience, a 30% pickup in inefficiency When you move from rear load to ASL, Brent Belt taking out positions as we automate these plants somewhere in the neighborhood of 1,000 Positions net and I say net because we'll be upscaling some positions there. So that includes both positions coming out And then positions being added back and the net of that is somewhere in the neighborhood of 1,000 to 1200 positions over the next 4 years. And some of those do start hitting us In 2022 and then really accelerate in 2023, all of that, in addition to what we're doing on price, We'll have an impact on margins.

Speaker 9

Right, right. Very idiosyncratic. I appreciate that fully. So bigger question on pricing. So can you break it down on the 5.5 collection disposal yield between call it your open markets and your more restricted markets?

Speaker 9

Because it feels Like a lot of the pricing momentum is being driven in the open market right now, but that CPI link to that regulated return pricing Should accelerate as 2022 plays out. So I know you're talking about the high watermark in Q1 On core price, but why would it fade if the restricted piece is going to accelerate? Or is it just not enough Mathematically to get it to keep the pricing where it is today.

Speaker 5

So Tyler, I think the easiest way to look at it, we don't have specific breakdowns between Open market and restricted prices, but what we've talked about is with rate restricted pricing, we do reset about 70% of that in the first And so those resets being loaded toward the first half is one of the reasons that we expect the high watermark to exist In the first half relative to the second half and then it comes back to those comps. What I would say is that our pricing on the street continues to have momentum over the course The year as our contracts come up, particularly on open market and some of them Actions that we took and the impact of fuel that we discussed will certainly continue to drive price higher. That's not reflected in Your collection and disposal yields, but I really do think that this comes down to being focused on our market based pricing And knowing that, that momentum is not what's slowing, it's just the comparisons on a year over year basis And the fact that we started to take pricing action more reflective of the cost environment in the second half of last year.

Speaker 8

Okay. No, that is very helpful.

Speaker 9

Thank you guys so much.

Operator

Thank you. And our next question is from David Manthey of Baird. Your line

Speaker 12

Yes, thank you. First question on labor and benefits, Both OpEx and SG and A, I think you noted that the proactive 2021 wage increases from last year, but Are there any other parts of that cost stack that are elevated or understated this quarter that we should watch for the remainder of the year, things like, I don't know incentive comp or healthcare or anything like that?

Speaker 4

I'll start the operating side, Navin and Kawhi and then maybe the SG and A We spoke to labor, obviously, been a long pole in the tent continuing to see high single, low double digit inflation On labor, I think it's most pronounced. We mentioned in the residential line of business, most labor intense line of Business that we have, I would tell you, maintenance, in my prepared comments, David, we think that if there are some supply chain disruptions That linger through the balance of the year, we may be in a position where we're going to keep some of our older fleet employed for a little bit longer until we catch up. We don't see that As a barrier to be able to take advantage of some of the volume and market share that Jim commented on, it may put a little pressure on OpEx versus CapEx. But as Sabina said it's early in the year and we've got a little bit of time here before. I think we need to pivot.

Speaker 4

That would be one spot in the P and L where you might see it on the operating side.

Speaker 5

And then on incentive compensation in Health and Welfare specifically, what I would tell you is I do think that incentive compensation could modestly increase over the We increased over the remainder of the year from the Q1 level. Just as we get further into the year, we'll get finer on our estimates and outlook and therefore the accruals. But with regard to health and welfare, we are seeing the trends of those costs return to pre COVID levels where medical activity is getting back to normal and as a result, those costs are Pretty well in line with what we would have expected. They do tend to moderate over the remainder of the year, but nothing unusual on a year over year basis.

Speaker 12

Okay. Thank you. And second on recycling, Could you update us on what percentage of recycling revenues are under some form of fee for service agreement? And Historically, you've told us that about 2 thirds of the material that you collect has 0 to negative value. And I'm wondering, Is that still directionally the case?

Speaker 12

And as you put in these state of the art automated MRFs, does that percentage change materially?

Speaker 4

So David, the MRSA we're automating are certainly producing a better product and doing it more efficiently. And I think that model actually gets Better with the labor increases we're seeing, right? We're employing less labor in these plants. The rates are going up. So the investments we were talking about 18 months, 24 months ago and upgrading these plants is actually printing better now just because the arbitrage has gotten better.

Speaker 4

The quality of the product coming out of these facilities It's better when you use a mechanized process to pull that material out. It stands to reason that you would get a better cleaner product coming out of there. I think on the pricing side, what we're seeing is very consistent and strong demand. On the fiber side, mix Paper has been a good tailwind over the last couple of years, and we're seeing continued demand increase for some of the other streams, the plastic streams. So we feel good about the top line and the demand that's being created.

Speaker 4

And as I mentioned, that's something we're going to continue to do is to educate our customers and use technology to unlock Some of those streams.

Speaker 13

I would

Speaker 4

tell you in terms of negative value, the one that probably stand, I mean, there is a residual content that tracks in the high To about 20%, we've been working on getting that down over the last few years. We feel technology will continue to help us in that regard. It's really the residual piece And glass, right? There's not really any positive market for glass. There's an environmental benefit to arguably Keeping it out of the stream, but there's not a market that's positive for glass at the moment.

Speaker 4

Did I catch all your questions?

Speaker 12

That does it. Thank you very much.

Operator

Thank you. And our next question is from John Eastman of KeyBanc Capital. Your line is open.

Speaker 14

Hi, team. Thanks for taking my questions. Just coming back to the margins, As a summary, do we need to be thinking about that 0 to 40 basis points Of expansion for the full year differently in light of what we've seen in the Q1 and the movements on fuel? And are we still going to be down 100 bps in the first half like you had communicated previously? If you're willing to sort of refresh those expectations, that would be super helpful.

Speaker 5

So Sean, I think Fundamentally, what this comes back to is us not wanting to be in a position to revise guidance across the board after just 1 quarter. And so the overall trends that we expected where our first half comps are just going to be tougher from a margin perspective than the Build as we get into the Q3 in terms of margin performance still holds. In terms of the magnitude of it, I think Tyler's question earlier about the impact of fuel, framing that as about a 20 basis point to 40 basis point impact Given what we're seeing in diesel fuel, we're pretty satisfied that we're going to be able to absorb the negative impacts of that. And so when we look at full year outlook for margin, we do see some upside, Particularly because price has come in so strong and we've seen positive momentum on retention, it's just too early for us to update the Specificity with regard to how we see that flowing through for the rest of the year.

Speaker 14

Okay, totally fair. Great answer. And coming back to the alternative fuel tax credit dynamic and those not being renewed yet, how is that Built into the full year and how big of a swing is that if or once those tax credits are renewed?

Speaker 5

Yes. So it was $12,000,000 for the quarter. The full year impact is expected to be a little north of $55,000,000 the impact for the remainder of the year, we estimate to be about $45,000,000 We fully We'll end the year with some clarity on this, but if we don't receive that clarity, it would be about a $55,000,000 $60,000,000 negative impact relative to the guidance that we provided.

Speaker 14

Okay, excellent. And then Just real quick, relative to the $400,000,000 EBITDA guidance for the RNG facilities by 2026, Can you tell us what that EBITDA number was in 2021 actual and what that number is in the 2022 guidance?

Speaker 5

I don't have the specifics on that. Evan, Heather will be able to get you more color. The only thing that we The year over year increase and that was $13,000,000 of the year over year benefit in the quarter. The color there I would give you is that we estimate That for every $0.10 change in RIN values, we see a $4,000,000 to $5,000,000 change in our EBITDA and that continues to hold through 2022. We will see that increase to hold through 2022.

Speaker 5

We will see that increase as we get into 'twenty three with additional production. I think it

Speaker 3

was about $180,000,000 in 2021. But I didn't have to verify that, but I think think it was about $180,000,000

Speaker 14

Okay, got it. All right. Thanks a lot guys. Nice job.

Operator

Thank you. And our next question is from Noah Kaye of Oppenheimer. Your line is open.

Speaker 11

Good morning. You mentioned you picked up about $20,000,000 Annualized national account revenues this quarter, I think you mentioned also the sustainability services were a big driver of that. So Jim, I just want to build on Your comments earlier, can you give some examples for investors of what services The customer is actually asking for in values, what you're providing here that maybe smaller competitors aren't That's helping you to win this business?

Speaker 3

Well, when we talk specifically about National Accounts, I mentioned that data and analytics are very important They all have sustainability initiatives, every one of them. And so when we think about renewing some of these big national accounts We renewed or signing new accounts. One of their primary asks is what kind of reporting tools do you have that can provide me information And on a store by store basis, for example. So that's critically important, and that's been a real differentiator for us.

Speaker 11

Okay, that's helpful. Thanks. And then I just want to understand a little bit The way you're proceeding with the automation initiative on the resi line transitioning to ASLs, Are you thinking about those investments as timed with contract renewals? Or is this really For fleets that are on existing contracts. In other words, this is sort of a mid contract type initiative.

Speaker 4

So I would tell you, Noah, where we have the opportunity to do a mid contract, we're going as fast as we can. We're not waiting, so to speak, For contracts to roll, I think a lot of municipalities were having some really productive discussions with them because they've seen whether that we're a service provider or not That's a strain on labor showing up in the ability to service some of these municipalities, and we've seen opportunities to step in and convert These mid contract and certainly to the extent that we are not able to do that, there is that period of time when these municipalities or franchises are going out for bigger RFP And we're trying to make sure we're in front of that to have productive and educational conversations, if you will, about what the benefits are Of automating these services.

Speaker 11

But just to clarify, I mean, for some of these routes, these municipalities, I mean, the type of container may have to change as well. So there is some work involved, right, in educating and getting That change in place, but for you just to clarify the ROI is good enough such that You can put in the time and effort to have those changes take effect and convert the fleet over and you're just getting the savings On the labor and the efficiency?

Speaker 4

Absolutely. I think for the municipalities you bring up a good point. When you go to kind of the pickup everything at the curve model to A containerized model helps in terms of the municipalities understanding managing their costs and the quality material on the recycling side. And I think I won't go down this rapid trail, but all the technology we put on the trucks becomes that much more valuable when you automate the service and we've got the ability to look at each of these transactions To help educate these customers.

Speaker 3

When you think about the returns, though, I mean, it's a pretty easy math equation. On the negative side of the ledger, you get a higher capital cost for an ASL versus a real order to the tune of about $60 maybe or 20% of the cost of vehicle. But on the positive side, obviously, you get a helper coming off the back, put whatever number you want on that. And that is perpetual, whereas the capital cost is a one time cost for the life of the vehicle. And then you get a safety improvement.

Speaker 3

You get a 30%, as I mentioned, a 30% pickup in productivity Our efficiency because we're just we're picking up 30% more homes per hour with an ASL than we are with the real owners. So The math is really compelling, makes sense for us to move as quickly as we can, to John's point.

Speaker 11

Great. Thanks so much.

Operator

Thank you. And our next question is from Michael Feniger of Bank of America. Your line is open.

Speaker 15

Yes. Thanks guys for squeezing me in. Just on pricing, you mentioned Q1 as a high watermark. And we think of 2020 with your core price of 5.5, yield of 4, just why would it those parameters just Top down view, why wouldn't they be higher in 2023? Is that what we should be expecting?

Speaker 15

Would you let your foot off the gas maybe on the open market as restricted resets higher next year? I guess I'm just trying to Put it together with the Q1 being really strong, the high watermark yet is going to decelerate a little bit in the second half. How do I think about those that 2020 parameters as we kind of move to 2023?

Speaker 5

I think, well, I may have said it A couple of times already. I do think some of it becomes about the math. And I don't intend to make it overly simple in Looking at that, but next year's Q1 comp will be very difficult. We do think there is benefit from the rate reset On the restricted part of the book because this year's reset didn't fully contemplate all of the inflationary impact because they are backward looking. So we think there'll be another step change in that part of the business a year from now.

Speaker 5

In terms of our Activity on the street, I think it's important to know we don't see anything that's slowing this momentum down. So we would like to see some We're creating a cost inflation environment that would allow us to view this a little differently going forward. And I think our focus on customer lifetime value will always ensure that we're being data driven and customer focused in how we push Our pricing efforts forward.

Speaker 15

Very helpful. And just last one, Devina, you mentioned how the cost inflation stepped up 7.5% second half to 9%. Now obviously, you guys are driving price. I'm just curious what's kind of embedded On that full year cost inflation, because I know there's expectations that that's going to moderate with the cost, but how should we kind of think about that plus 9 number for the full year?

Speaker 5

We generally look at our cost of inflation at 3% to 4%. So just the normal course would be at that level. And so you can see that we're meaningfully higher than that now. Our expectation in the back half of the year isn't

Operator

Thank you. And our next question is from Kevin Chiang of CIBC. Your line is open.

Speaker 13

Thanks for taking my question. I'll be quick here. Congrats, first of all, congrats on a good quarter. Maybe just on the comments, you made it a few times, Jim, just on the data analytics and the demand from national accounts or larger customers in requiring this data as they go on their sustainability path. Is that what you charge for?

Speaker 13

Is that looking at ancillary revenue service that you're offering? And if not, does it become ancillary revenue service? I suspect more customers are going to need to kind of track their scope 3 emissions and their broader environmental footprint.

Speaker 3

Yes. It's a good question, Kevin. We don't currently charge kind of a separate price for it. It's packaged Together in our service offering from national accounts. But it's an interesting it's kind of an interesting prospect that could we charge And it's something we've thought about.

Speaker 3

Could we charge for these separate services related to data and analytics? So for today, the answer is it's a package deal. For tomorrow, potentially, it's something we can charge for separately.

Speaker 13

Okay, that's helpful. And that's kind of a follow on question. You kind of mentioned again, this is one of the levers you're pulling on To grow volumes above what the market is doing, you're taking share. I suspect maybe the smaller accounts, This might not be a service that's appealing to them. So I suspect you're solving other pain points for customers as you grab that market share and it doesn't feel like You're getting aggressive on price to win volume.

Speaker 13

So what are some of the other pain points you might be solving for, let's say, smaller accounts that on Board with Waste Management, if it's not being pricing driven.

Speaker 3

I think the sustainability piece should be important to everybody, but you're right. I mean, it tends to be more important to the bigger customers. When we think about the digital approach that we've taken to customer experience, That impacts everyone as well. And that may be even more heavily used with smaller customers. I refer to the airlines a lot and what they did on the front end of their operation with moving away from the call centers 20 years ago.

Speaker 3

We're in that process now. We're digitalizing that entire customer experience and everything can be handled via your

Speaker 1

personal device or your laptop at home and

Speaker 3

you don't have to device or your laptop at home and you don't have to reach out to a call center. That's why we've said, look, For those physicians as they address, we've made a decision to not replace any of those And that starts in kind of Q2, Q3 of this year.

Speaker 13

That's helpful. I'll leave it there. It's been a long call. Thank you very much.

Operator

And there are no further questions on I will now turn the call over to President and CEP, Jim Fish.

Speaker 3

All right. Thank you. Well, I guess it goes without saying that we're very pleased with the quarter. The short term outlook is very bright for us. Even with some of the economic pressures that were discussed today, but I think most importantly, we're really focused on this Strategy that produces, we think, great results and differentiated results over the next 3 to 5 to even 10 years.

Speaker 3

We're excited to see the results of this. So thank you all for joining us this morning and we'll talk to you next quarter.

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Earnings Conference Call
General Dynamics Q1 2022
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