Waste Management, Inc. ($WM)

Welcome back to Day 4 of Oppenheimer's 21st Annual Industrial Growth Conference. I'm Noah Kaye, Managing Director in Oppenheimer's Industrial Innovation Research Practice. We're really happy to welcome back to the conference, the management team of Waste Management, WM. We've got Tara Hemmer, Chief Sustainability Officer and SVP, Mike Watson, Chief Commercial Officer, SVP. Welcome to you both. Thanks so much for the time.

It's great to be here. Thank you.

Thanks for having us.

So I would love to start with solid waste, which is, I think, is still a pretty big part of the business. And maybe just kind of kicking off with looking at this past quarter, the 1Q price yield came in stronger than you previously anticipated. I think on the call, Jim called out resi and MSW as being drivers. So maybe can we benchmark where you are in the journey on shedding unprofitable resi volumes? And how you think about price growth across the collection lines of business on a sustainable basis?

That's a great question. We're really proud of our price performance for Q1. I think the highlight that you mentioned, which I think is really important is our ability to drive both yield and volume in our MSW line. I think that just helps really -- everybody understand how we can leverage our best-in-class assets and making sure we can get the price we deserve for that line of business, but also keep the volume so that upper 6s yield and 2.7% volume is a great story. But getting back to residential, we really are committed to the strategy we have been for the last several quarters. We've had great core price to the upper 6s. That has been at the expense of some volume degradation. But I'd say we're in probably the last 1/3 of that journey. But when I look at the results of improved margins. Actually, I think John mentioned this on our call, about 200% improvement in EBITDA over the last few years, but we also have grown revenue with less volume. So the profitability there has been great. We've introduced automation, better contract terms and improved revenue per unit. So I think it's a win all the way around the board for our employees, our customers and our shareholders. But as I look at the back half of 2026, we had some spikes in early in this year around negative volume. That will subside. We'll still be a little bit negative at the tail end of 2026, maybe negative 2% or 3%. But as we look into '27 and '28 and beyond, we'll see that start to level out. But it's a strategy we're committed to, and it's yielded great results. and we're proud of what we've accomplished.

And on the pricing question across the different lines of business here. I mean we used to think about C&I being where you'd see the most sort of natural price growth to see resi pace price is -- again, it's a testament to what you talked about with improving the profitability. But if we sort of normalize through the cycle, and obviously, depending on what's happening with inflation. How do we think about kind of where pricing should be for the different lines of business?

I think the way we're looking at price, frankly, is the price/cost spread, and I think you've heard us talk about that. And for 2026, we looked at about 250 basis points of spread between our core price and inflation. We're actually delivering in excess of that. There are some indices that are pretty clear, whether it's CPI or CPI-WST that have an impact in our business. But for the most part, our goal is to make sure we use our analytics or customer lifetime value to really understand how we can move price where we can, where we can't. And I think that's been really the success that we've had at WM is utilizing these tools and understanding customer lifetime value, still having a really strong core price but not having the degradation in volume, which I think we've stood out from a volume standpoint compared to our peers, the way I look at it. I think that's just a testament of how we're balancing our price/volume equation.

Yes. You mentioned the MSW volume strength. And I think Jim had talked as well about the increasing tightness in the industry's landfill capacity as a driver. That was the theme at Investor Day as well. But this is a trend that's been going on for decades. So what if any inflections are you seeing now around tightness in capacity? Is that rate of tightness in the industry? Is that increasing as you see it? Is it set to what's driving that? Maybe just some color.

Well we've been pretty clear, we have in 9 of the 10 largest markets, really strong landfill competitive advantage when you look at it across our peer group. And that's something that we're looking to grow and expand. And what that's going to come down to is as capacity comes off-line in some constrained markets, if you think about New England, primarily the Northeast, but we're seeing it in other spots, too, is how do we make the connection between these large centers of waste to more regional landfills. So we've invested quite a bit and looking at how do we connect the dots between our transfer station network and our landfill network, whether it's through trucking or rail based connections that we've been at for the last 20 years. We think that if you look forward to 2030 and beyond, we'll be even better positioned then than we are today to be able to ensure that we have longer-term capacity that will meet our customers' needs, something that we've invested heavily in.

So you're kind of tying the link, the logistics linked to these major metro areas. And that's with some of the investments that you've called out. And it's at the same time that the capacity around those markets is shrinking. And that's the best way to think of it going forward that you're investing while like the rest of the market is pulling back basically on this.

I can't speak for what others are doing with their own investment strategy, but I can say that we have a enterprise network planning function now that their sole purpose is to look at this and do scenario planning on when our landfills might be closing when competitors landfills might be closing and making sure that we have the long-term connections between the regional markets. That's going to be a differentiator for us moving forward.

I think it's a great point, Tara. And I think that information of the enterprise network planning group is providing is helping us understand where we have the opportunities for price and volume. I think that's why you're seeing such a staunch performance in both yield and volume, understanding the next best alternative for these waste flows. Short and long term, I think, is where we're making the investments appropriately.

It's a very helpful point. Looking at the January guidance, which assumed volumes of -- headline volumes, right, of 0.2%, 0.6%, you're overcoming I think, 50 basis points wildfire headwind. So you talked on the call -- on the earnings call about underlying special waste activity as a positive leading indicator this quarter. Can you give us some more color on the drivers for underlying volumes to turn cleanly positive? How that might play out, whether it's this year or following?

So the conversation we just had about landfills and our landfills being strategically positioned. That speaks to what we saw related to special waste volume, but also our MSW volume being so strong. and that's something that we expect to continue through the balance of the year. For 2026, it's very much a first half, second half story. The first half of the year, we had some significant impacts related to weather that we didn't anticipate. That was about half of the volume impact for the quarter. And then, of course, most of the volume from the wildfires last year was in Q2. So what we anticipate seeing is volume in the second half of the year be close, if not positive. And that's going to be driven again by special waste and landfill volumes, but also we've talked a lot about residential Shred-it -- shredding -- shedding. Thinking about Shred-it there for a second. We do Shred-it as well. But residential shedding and we're not at the complete end of that. We still have some customer losses that we're navigating. But what we're really proud of is as that volume has declined, if you look at what's happened with our resi EBITDA and then also our margins, it's been a turnaround story. And it's going to position us well for volume growth with those residential municipalities or other customers. I think the market is seeing this is a service that is necessary. There's a cost for this service, and it's something that has to be valued moving forward, and those are the markets we're going to play in.

Thinking about and exploring customer value and how you can get and retain more price is actually a good segue to what I want to talk about next. And Mike, I think I'd be very, very curious to hear how you're implementing this. We've seen some of the industry players in the space, right, implementing AI as a tool to get and retain more price. I think WM has been sort of focused on analytics to drive stronger pricing for -- well, as long as we've been covering you, which is over a decade now. But can you talk about what you might be using AI for on the pricing front and more broadly at a customer-facing level? And what goals do you have for pricing related to these initiatives?

Yes, that's a really good question. I think first things first, I think there's the utilization of predictive analytics, then machine learning, then AI. And I think we're using those in very different fashions. I think we've been leading, as you mentioned, on a lot of the predictive analytics and really what that comes down to if we think about our ability to get core price and have minimal impacts to rollbacks of those pricing as well as not having significant volume shed excluding the residential, which is much more demonstrative. I think it kind of -- it comes down to the information that we ascertain in the customer journey, what our customers are experiencing and what they look like compared to their peer groups, what kind of service experience have they had, all of those play a role into our analytics suite, and then we apply some machine learning and some AI around how we implement that. We do not let the artificial intelligence actually execute the PIs. And I think that's where we want to make sure we have some controls. But as Jim mentioned on the call, too, we've been using artificial intelligence to evaluate the volume that's coming into our containers and ascertaining how much of that is contamination. Do we have overages. So all those mechanisms play a role in, I think, the overarching revenue management approach that we have at a WM. But I think because we have some maturity, we're bringing that up the customer journey more as far as prioritizing customers, how we provide information to our sales organization to focus on specific sales processes or action. So all the information we are using and really evaluating is help us drive a better customer lifetime value. And I think there are certain things in the customer lifetime value that are friction points. We're trying to remove those. We also understand that they will have an impact on our customers' willingness to pay or readiness to accept a price increase. So we look at all that information to make sure we aren't exceeding the value that our customers are receiving. It's never perfect, but I think that's what's helped us maintain a strong core price with minimal impact on volumes.

There's a lot of interesting things I'd like to follow up on there. So you said you don't let the AI execute the price increases. I think we would have assumed that does it help you to generate any kind of base case or sort of estimated -- have you used it as a tool at all to help guide the sales force? Or is this sort of being more applied at sort of a higher level to gauge effectiveness?

Well, the utilization of AI starts to branch into multiple disciplines in the organization, whether that's in our customer experience. We use our artificial intelligence to help our sales team evaluate the calls and the interaction with our customers. So it's just the information. I think that's where AI is -- I'm using the information and you're letting the machine make the decision for you and replace human intelligence. We're using the information to help sort the data like a human, but do it at a much more rapid pace. And because of the scale of the information we have, we're using artificial intelligence to help us make decisions quicker and implement those along the customer journey.

Yes. And you mentioned the friction points. I mean I remember at Investor Day, you had a goal to triple your digital customer transactions. And you talked about these friction points in the customer journey. It's extending customer lifetime value. And you had some real numbers around it, right? I think you said over $100 million over 5 years. So just -- what are the most important friction points to be cognizant of, first of all? And where are you in that journey?

Sure. It's a great question. I think when we think about friction points, I always think about this inside the customer journey with WM. There's -- it's how a customer is onboarded is the container delivered on time in the right location? Are we providing a reliable service throughout that customer journey? And then are there any reschedules? Those are the three main friction points. It's really around reliability. And if we're reliable, we extend the customer lifetime value, but it -- as I mentioned earlier, if we have some reliability issues we had to reschedule due to weather the like that plays a role into some of our evaluation. But those friction points are something that we focus in on every day, but we review those with our areas every quarter at our corporation, but we've reduced those friction points significantly over the last several years. And that's what I'm really excited about, those friction points are coming down. And if we provide better service, it's an extension of customer lifetime value. Getting back to the digitalization part, we've invested significantly over the last 5 years in our self-service capabilities, and that's been a big win for us. Win for the customer because they can engage with us with a channel of choice, but it's also reduced our cost to serve. And just a quick stats. Even if I look at compared to last year, our calls in our call center are down 19% quarter-on-quarter year-on-year. Our digital interactions are up 2x that. So we've utilized technology for customers to engage with us quickly on their own time. We've also -- we've done a lot on our digital chat, artificial intelligence for customers to get their information they need. For example, what's the estimated time of arrival, when is my pickup day I need to exchange my container or I need to order a bulk pick up at my residential home. All those things are quick transactional elements that we've invested in, that has really helped us provide a better customer experience, but also bring down the cost to serve because the call into WM is the most expensive channel. The more we can push to the low cost, very high customer experience channels is a win for us. But where I would say we're about 1/3 of the way there. My goal is to triple it by the end of 2030. And we're making some great progress. I think it's a little bit of a balance of our customers' choice and us making sure that we can meet them where they are and guide them to a better customer experience in digital transactions. We're constantly trying to make that better and better with technology and AI as well.

I mean I think we all intuitively get the appeal of that as customers, right? I would much rather just punch it up on my phone and find out what my pickup days. I don't want to wait on hold for 5 or 10 minutes to find out. And so that's a win-win, right? And so I think that's a good example. Thinking about national accounts specifically, they've grown, I think, 12% annually as of your last Investor Day. And you reported a really high retention rate, if I remember right, 99%. This is a $5 billion TAM. With that strong baseline, what's your ceiling for national accounts growth over the next couple of years? And are you seeing any signs of wallet share saturation among your largest customers?

That's a good question. I think that's been a bright spot for us where we've really differentiated WM in the eyes of our customers. If you think about that national account space, they want a scalable service provider. They want reporting. They want a sustainability partner, which we play a big role in. But the reporting and regulatory support over North America is really the value prop that's allowed us to grow this space. We think that $5 billion TAM is quite conservative, but what's interesting is you're seeing a lot of consolidation of some of these retail establishments. There's also growth inside of our existing customer base. And lastly, with our connection with Stericycle and Shred-it, it's allowed us to expand a larger addressable market and really provide a comprehensive environmental solutions to these large retailers that might be medical waste, will need document destruction as well as the legacy WM. So being able to provide that is really an exciting augmentation to our cross-sell, which we talked a lot about. And our pipeline is rich. We've already had a lot of new business coming from cross-selling between legacy WM and now our Healthcare Solutions group and bringing that together has been quite powerful. So we still feel that there's upside for that got industry consolidation. You've got growth just naturally in the TAM. But I think our value proposition there has been strong, and we're seeing that growth continue in 2026 as well.

Yes. I would love actually to dive into WMHS in a minute, but I did want to ask one more question more broadly on the solid waste customer base. And this may also be a question for Tara. In fact, I'm pretty sure it is. You've talked about WM's brand as synonymous with sustainability, right? And I think in the past, it's been a clear driver of open market residential and SMB growth. It is fair to say that some large corporates have paused or in some cases, pulled back on ESG commitments. And so how are you tracking whether sustainability as a sales differentiator is actually strengthening for you? And how are the shifting demand trends around sustainability change your go-to-market approach?

I'll take this one. first. I spend a lot of time with other Chief Sustainability Officers and we all get this question right, given the current climate and environment, in particular, in the United States, what's really happening. And there's a lot of companies who are still doing the work behind the scenes. They're just not as vocal about it for a variety of reasons. But when you pull it back to our business. For a lot of our customers, sustainability means recycling as a service. And most people still want recycling as a service. Their customers, our customers' customers want recycling as a service, whether it's in their stores or they want to know that at the back of a big box retailer that all that cardboard is getting recycled. And so WM is in a position where we can help them with those needs. I always like to say the one thing that WM does really well is we do complicated really well. If you're a large customer and you have many different types of waste, whether it's medical waste or hazardous waste or core solid waste or recyclables. We know how to handle it. We know how to get it to the right spots. We know how to track and report for you that what the greenhouse gas emissions might be or how the material ended up getting turned into something else. And that really comes back to being a trusted brand. So it's -- now there are some customers where that is not their priority sustainability, but I would say all of our customers have one of the same priorities, which is reliability. And WM is incredibly reliable. If you think about the number of customers we touch every day and our ability to pick up your waste and recyclables every day, day in and day out, and to improve upon that through our routing capabilities, that's something that any customer is going to want.

I think it's well said, Tara, I think the only thing I would add is that when we looked at our brand, we wanted to be synonymous with sustainability. We also wanted to stand out from our peer group as a beacon brand in our industry. And I think we've accomplished that through leadership and sustainability, but that it's wrapped up in responsibility and reliability that Tara mentioned, and that's where we get the brand awareness and favorability that drives the growth. I think you could talk about super complex sustainability programs that Tara mentioned. But if you think about the average customer, they want reliability and responsibility, but our brand has created that awareness and favorability to drive those sales channels as really a differentiator in the industry. I think that all wraps up into our go-to-market strategy around sustainability leadership. But if you break that down in simplest form, it's we're responsible and we're reliable and we're a trusted partner. And that's what resonates no matter where you are in that chain of sustainability awareness or part of the business. But they just want a partner to help them with their needs.

Great segue because speaking of reliability, and responsiveness to the customer. Can we talk about WMHS? And specifically, some of the key initiatives to improve the customer experience and customer satisfaction. How are you measuring that progress? And what can you share with us?

Yes. It's -- we're excited and we really are seeing the growth potential in WMHS and the Stericycle, Shred-it being something that's going to give a step function growth, and we're still committed to the 5% to 6% revenue growth that we talked about at Investor Day, getting that stabilized and specifically the ERP is something we've spent pretty much since the close -- and we still have some work to do for further refinement of those processes, but we have stabilized the ERP. And we're seeing that in the conversations we're having with customers, and our customers at risk have come down significantly over the last year. Our past due balances have come down. Our DSO is reduced by 14, 15 days. over the last couple of quarters. But more specifically, if I think about our satisfaction scores, those improved 5% this year. Our calls into our call center are down 30% and we're starting to see a net positive customer growth in almost all the channels. So I think all the work we've done and we definitely had some history of some inaccurate bills that had some customer impact. And that's having a little bit of a volume impact for 2026. We feel like we've stemmed that tide. And now we've stabilized the system and we're starting to build sales processes, operational improvements that we've proven at WM are starting to integrate into the WMHS, both Shred-it and medical. And even our on-time performance has moved up 5 basis -- really 5%, close to 97%. So all the key -- at least the way I look at the customer initiatives, are we on time servicing our customers, what are our customers telling us when they talk to an agent -- all the key metrics from a overall satisfaction are trending in the right direction.

You said on time has moved up to close to 97%.

97%, and that's moved up significantly.

What was it when you acquired the business?

It was in the upper 80s, lower 90s as far as on-time performance. So that's been -- and that's something we worked on early is how we provided information from the system to the operations team. That was a big improvement because we're moving customers around a lot. It was a big impact to customer satisfaction. So really excited about how we're performing operationally. That's very solid. We've stabilized the billing. Now we're ready to turn the corner and start to use this as the growth platform that we knew it was, and we're seeing each quarter a better improvement in our net customer growth.

So how does that translate to the ability to go get price. When do you actually start implementing the price increases? And how does that roll out across the customer base?

Well, I think that might be another myth buster. We have been implementing price increases along since the acquisition. It's the opportunity for those price increases that are overshadowed by some of the volume losses that we are experiencing for some of the large hospitals. So we've been implementing price increases. We have been giving -- I think Jim mentioned on the call some credits back to customers for previous billing periods in '24 and '25. Those are starting to come down each and every quarter. And the way we look at WMHS for 2026, it's a first half, second half, where first half still cleaning up some of the customer credits implementing price increases. So price increases continue to trend up as we implement WM's pricing activity, credits coming down, and we're starting to see a net customer churn moving in the right direction. So our plan is to really commit to a overall, a little bit less around 3% revenue growth for 2026 as a bridge to 5% to 6% in '27 and '28 as we had through our plan.

Well, mathematically, it would imply that if you're going to go to close to 3% for the full year, you're going to be close to mid-single digits for the back half. Is that not correct?

Yes. And that's going to be mostly price.

So that's your exit rate going into '27 as a base case. So you effectively be running that way?

Yes, if you think about moderate price in second half, pricing increasing in 2026, back half less volume impact, less credits that starts to build the bridge to 5% to 6%. And I feel really comfortable and confident that the environmental service suite that WM has put together with this business is unparalleled. I think it's really going to set us up for some great growth in '27 and beyond.

Forward to that. I think turning in the last segment to some of the growth initiatives around sustainability, specifically RNG and recycling. In January, you'd guided to 21 million to 22 million MMBtu of RNG production for the year. I think you mentioned some timing considerations on the earnings call last week. So does that production target still roughly hold? And just to give us a sense of how much more incremental production you -- we should expect to see once the fleet is fully built out.

So first and foremost, we're really pleased with how the construction and commissioning has gone related to our plants. We've just experienced through recently some delays in interconnects with the utility to be able to push the renewable natural gas into the pipeline, which has been the cause of some of the volume shortfalls that we're anticipating. So that 21 million to 22 million, we expect that to come in below the lower end at this point, but will be more than made up by the pricing that we're seeing. And the most important thing that I want people to take away is that our long-term volume targets are in place, that 27 million to 28 million MMBtus. We're pleased with the performance of the plants and the volume that's coming out of the 20 landfills that -- where we put the RNG assets.

And should we be more or less at that run rate by the time we get to '27, the '27 and '28?

Yes.

Okay. And I think you mentioned on the earnings call that you've already contracted 80% of RNG production for '26. Just -- can you share with us where blended average prices have gone to I think in January, it was 27% per MMBtu.

Sure. So our framework, our risk framework has always been to be between 70% to 90% contracted in the current year. 30% to 50% contracted in the next year and then 10% to 30% contracted in that second, third year out, however you want to view it. And we're in 80% today, which is exactly where we want to be and roughly on that 80%, a smid shy of $28 per MMBtu, which really speaks to, one, how our team is able to do contracting a little bit forward. And also RIN pricing has held up since the RVO was finalized, and we've been in that $2.40 per RIN range. So all of this tees up nicely for us to be long term at or above our $26 per MMBtu target that we had really framed up back in late '22, early '23.

Very helpful. And I guess sort of a more strategic look at this is, as you mentioned, there's been a little bit higher demand for RINs following the RVO finalization. There's longer-term visibility on that. Maybe just walk through the decision-making framework for how much to contract future obligations versus leaving contracted -- and how you might be managing that book in the future? You talked about the framework that you've been applying the 7% to 9%, 10% to 30% for the following year, might you consider increasing that percentage on forward just given we know that the demand is strong.

The short answer is no. I mean I think we're pretty comfortable with our risk framework. And basically, if you look at it over 3 years, it has us 50% contracted and 50% uncontracted. So it still leaves some ability to get the upside of RIN prices, if RIN prices were to improve and also to give us some upside on the voluntary market as the voluntary market further evolves. As a reminder, roughly -- it's roughly half and half. Half of our volume will be in the transportation market and half of it will be in the voluntary market. So that gives us the ability to get some benefit as prices rise.

Makes sense. And then just around the CapEx that you've been investing. I think you said $85 million on the call around sustainability CapEx for two RNG facilities and recycling project. Just kind of help us understand the IRR hurdle you're applying to these new growth projects. And if at all, that threshold has evolved given commodity price movements.

Well, I'll start this question by talking a little bit about our new CFO, David Reed. And what I will say about David is he is no less disciplined than Devina Rankin was. And so we're putting these investment decisions through a similar lens. But I would also say that we're -- now these projects they're competing against other WM capital projects. And it's important to remember that with new RNG projects, we really have to look at them in the transportation -- sorry, the voluntary market. And that's going to be a lower price point compared to the transportation market. And the payback periods, if you look at the RNG projects, there are probably any future ones and these two, in particular, are probably going to be more like in the 4- to 5-year range as opposed to 3 to 4 years previously. Recycling projects are a little bit different because our investments, the one recycling project that's on the page here is one in Edmonton, which is really in response to extended producer responsibility. And those projects, the two that we just did and completed in Ontario, they have almost no commodity price risk. And we've demonstrated those two projects are performing extremely well for us, exceeding our expectations. So those payback periods are in the 6- to 7-year range, which is what the recycling projects were before.

Very helpful. Tara, thank you. So I think we're about at the end of our scheduled time here. There's a lot more that we could and will be talking about in the future with the company. It's great to see the progress on these initiatives. Tara, Mike, thank you both for the time. And we hope everyone has a great rest of the day and the rest of the week at the conference. Thank you.

Thank you so much, Noah. Appreciate it.

Thank you.