Good day, and thank you for standing by. Welcome to the WM's First Quarter 2022 Earnings Conference Call. After the speakers' presentation, there will be a question-and-answer session. 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 Egl, Senior Director, Investor Relations. Please go ahead.

Thank you, Lorrie. Good morning, everyone, and thank you for joining us for our first quarter 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. John 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-K this morning that includes the earnings press release and is available on our website. The Form 8-K, 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. 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-K. John will discuss our results in the areas of yield and volume, which unless stated otherwise, are more specifically referenced 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 first quarter of 2021. Net income, EPS, operating EBITDA margin, and SG&A expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern time today until 5:00 p.m. Eastern Time on May 10. To hear a replay of the call over the Internet, access the WM website. To hear the telephonic replay of the call, dial (855) 859-2056 and enter reservation code 3365157. 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.

Thanks, Ed, and thank you all for joining us. The first quarter 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 $0.5 billion of cash to our shareholders. Our operating EBITDA margin of 27.6% was ahead of our plan, even in the face of record inflation and the delayed approval of the alternative fuel tax credits. So we executed extremely well in the first quarter and achieved better results than we anticipated, positioning 2022 to be another great year for WM. In addition to the strong start in the first quarter, 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. 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 first quarter and we're on track to bring online another fully retrofitted MRF in the second quarter, along with the next WM-built renewable natural gas plant. 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. Through our focus on digital technology, we anticipate reducing 5,000 to 7,000 positions over the next 4 years. In this tight and expensive job market, it makes 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-'23. Finally, while we use automation and data to our advantage, we will invest in training and upskilling of our existing employees to ready them for higher-skilled future roles. To sum it up, we've set the bar high in our first quarter 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.

Thanks, Jim, and good morning, everyone. 2022 began on a high note with first quarter organic revenue growth in the collection and disposal business topping 9%. Our expectation was that the first quarter 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% 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. 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. In the first quarter, we delivered record high core price, while maintaining churn near historic lows by using a data-driven and customer-focused approach. Shifting to volumes, first 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 from our first quarter levels, our project pipelines remain strong. Also contributing to our strong volume results was significant growth in our national account business. In the first quarter, our Strategic Business Solutions team won more than $20 million of new annualized revenue. These wins were driven by our ability to meet customer sustainability and operating needs through a differentiated use of customer-facing data analytics and service capabilities. Our teams remain focused on controlling operating costs. Overall, adjusted operating expenses were 62.3% of revenue in the first quarter. While cost inflation in the first quarter persisted in the high single digits, our operating costs improved 70 basis points from the fourth quarter of 2021, largely due to encouraging trends in our largest cost category, labor. First quarter overtime costs and training hours came down compared to the fourth quarter of 2021, as we've improved retention and been successful in onboarding new team members to transition from training hours to productive 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 2022 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 constraints. 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. Our first quarter revenue growth results reflect our success in moving residential pricing as our yield was 5%. In the recycling line of business, we delivered another strong quarter with operating EBITDA growing by $23 million. Our blended average commodity price in the first quarter 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 recovery while reducing our cost of processing. And finally, our renewable energy business contributed an additional $13 million of operating EBITDA in the quarter. We have a new renewable natural gas plant coming online in the next few weeks in Oklahoma, the 17th RNG plant in our network and the fifth developed by WM. The next RNG project is on track to come into service by the end of the year, positioning us to deliver on our 2026 targets as we expand our leadership in the landfill gas energy business. 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. We've 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.

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 first quarter. Our operating EBITDA growth completely flowed through to cash from operations, as lower interest payments more than offset a modest decline in working capital benefits related primarily to higher incentive compensation payments in 2022 for 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. First quarter capital spending to support our business totaled $371 million, and we invested an additional $47 million in our recycling and renewable energy businesses. Given our acceleration of sustainability growth in the fourth quarter of 2021, we spent a little less capital on these investments in the first quarter, 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 capital expenditures to support the business to be within our full year guidance of $1.95 billion to $2.05 billion, and sustainability growth investments to be approximately $550 million in 2022. As you heard from Jim and John, our teams are executing on the recycling and R&D 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. 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 first quarter free cash flow of $845 million. Before sustainability growth investments, first quarter free cash flow was $892 million, which puts us well on our way to achieving our full year outlook of between $2.6 billion and $2.7 billion. 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 million in dividends in the quarter, and we allocated $250 million to share repurchases, while maintaining our leverage ratio well within our targeted range. Turning to SG&A. We remain focused on controlling discretionary SG&A spending and leveraging technology investments to reduce the cost of our sales and back office functions. First quarter SG&A was 10.1% of revenue, a 60 basis point improvement over 2021. We fully expect to achieve SG&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. In closing, our strong results are a testament to the dedication of our 50,000 team members. We're proud of our performance in the first quarter and excited about what we can achieve together over the remainder of the year. With that, Lorrie, let's open the line for questions.

And our first question comes from Toni Kaplan of Morgan Stanley.

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 a really good place for reaching the full year guidance. But is it the supply chain issues or uncertainty just in the macro, just wanting to understand some of the drivers there?

I think, Toni, the last year was actually a little unique for us. I think it was the first year we've ever raised guidance in the first 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.

That's great. I wanted to ask for an update on the labor market, specifically regarding churn. Is there any impact on the projects you are implementing due to the tight labor market that might cause delays?

No, Toni. We've seen some increases in overtime, which I've 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. 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 a few quarters ago as the overtime was up, but the good news is that's moderating. Our overtime percentages are coming down, and our retention rates are better. So we feel pretty good about where we are and our ability to service any of these volume opportunities that present themselves.

And then, Toni, with regard to our process 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 strong 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 to accelerate the investment from here, and we're really satisfied with where that stands.

That sounds great. Maybe just one last thing for me. Core pricing looked really good in the first quarter. When you think about sort of the ability to offset inflation, it seems like that should be able to do it. Can you go beyond offsetting inflation? And when do you see core pricing sort of normalizing?

Yes. Look, I would tell you, for the quarter, we were pleased with the results from a price perspective, considering that we talked about a 4% yield and 5.5% core price. As you know, things do moderate a little bit as we get later in the year just because the comps change. So you shouldn't expect to see the same raw numbers in Q3 and Q4 because of the difficult comparisons. But we certainly have, I think, shown that we're pretty effective at using price to cover 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 7,000 jobs, that’s 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; it's going to be a combination of things that I think get us on a significant margin improvement path.

And our next question is from Jerry Revich from Goldman Sachs.

Yes, I'd love to continue the discussion on core price. If you don't mind, really impressive performance. I'm wondering if you can talk about whether you folks went back to 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?

Yes, Jerry, I can't say that not a single customer out of our $25 million has received two price increases, but we have really tried to move away from that practice. I hope there aren't any instances of that. What we aim to do is make price increases an annual occurrence for our customers. I can't guarantee that something didn't slip through the cracks, but I can tell you that while this may have been a practice from years ago, it has changed. Now, pricing is more of an annual item for our customers.

That's super. 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 outlined, Jim? Can we expect the full run rate earnings contribution?

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 the gas to an RNG process. So once the plant is up and we've kind of knocked the kinks out, if you will, it comes up to speed fairly quickly. None of these are landfills where we're starting with no infrastructure, if that were the case, it would be different, but that's not our situation.

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 the two facilities that we're bringing online in 2022. And because of the timing of bringing them online, it really did have a pretty inconsequential impact, particularly the one that comes in the fourth quarter. But we do expect a step change in 2023, and we'll give you more clarity on that as we get closer to that point.

Super. And I'm wondering if you folks would be willing to tell us the timing of additional plants coming online in '23 with the type of precise schedule that you laid out for '22 at this point?

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.

And our next question is from Hamzah Mazari of Jefferies.

Just in terms of pricing, do you have a sense of what percent of your customers actually push back on pricing? Because pricing in this sector from '09 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 push back or 10%, 20%? Just any sense of that would be helpful for investors.

Yes, I can't comment on the sector specifically, but what I can share is that we closely monitor a few key metrics. One is churn, which I mentioned is still close to historical lows. We haven't observed significant changes there, even considering the pricing we reported for the quarter. We also assess service increases and decreases as indicators of our overall health, and those remain very positive. Finally, we evaluate rollbacks, and I can confirm that rollbacks are significantly stronger compared to last year. Despite the ongoing inflationary pressures that customers are aware of, the value we provide in our services is contributing to the lower rollbacks, even as we’ve increased our focus on revenue quality.

Got it. Lastly, do you have a sense of how the sustainability investments affect the volatility of your portfolio? I know you mentioned the recycling aspect primarily as a cost reduction initiative. On the landfill and landfill gas side, have you decided between fixed pricing and being linked to market fluctuations? What are your thoughts on the portfolio's volatility after making these investments? Is it experiencing less or more volatility?

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 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 the business. 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 lifecycle 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. 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 here. We want to be sure that we're appropriately balancing ourselves between the spot market and the long term to maximize the returns.

And our next question is from Michael Hoffman of Stifel.

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 which was get in the market and do it aggressively to make up for '21. Just to remind us all, your once-a-year objective is on contract renewal cycles, not just once a year at a point of time. Is that correct?

Yes, that's right.

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

That's correct. The point about the price increase being annual suggests that there may still be some pricing opportunities available because we did not implement price increases as aggressively in March or April of the previous year. These opportunities will arise. Inflation did not significantly impact us until the third quarter, so you can expect an increase in pricing that we chose not to take at that time, even though the costs associated with servicing those customers rose sharply in the third and fourth quarters. The pricing adjustments won't reflect those increases until we reach the anniversary this year.

And our next question is from Walter Spracklin of RBC Capital Markets.

If we look at the volume again, special waste and commercial have performed slightly better than expected. It seems we are past the recovery phase, yet we are still seeing strong volume figures. Traditionally, we have viewed waste in relation to certain demographic factors and urbanization, which have been counterbalanced by diversion efforts, resulting in a generally stable volume trend over the long term, with pricing being a key opportunity. Is that perspective shifting now? Considering your volume trajectory and the ongoing growth, do you believe there are any structural changes happening that could positively affect volume growth in the long term?

I believe what is changing structurally compared to previous quarters is that we are really starting to distinguish ourselves from the competition. It's not just influenced by micro and macroeconomic factors; it's also due to our strategic initiatives. We often discuss short-term outlooks on these calls, but we are also focusing on our strategies. We are making significant progress in digitizing our customer service, similar to what airlines did years ago, and this is setting us apart from many in the industry. We believe we are gaining market share, which is reflected in our volume trends. While I can't provide specific details by line of business, we view this as a long-term strategy spanning 3, 5, even 10 years, similar to our sustainability efforts. Many customers are engaging us about data and analytics for their sustainability initiatives, and we are uniquely positioned to offer the level of support they need. This is not merely about microeconomic factors; it also involves our strategic approach, which I believe is successfully capturing market share and will continue to do so as we differentiate ourselves further in the future.

Great points. Turning now to M&A. One of your competitors obviously has moved a little bit outside of pure solid waste into a little bit of 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 are solid waste kind of your singular focus for M&A opportunities?

Yes. We are aware of the rumors. As I previously outlined our organic strategy, we are very pleased with the results we are seeing. At the same time, we will explore some small acquisitions that align with our sustainability strategy. That is likely where we will draw the line regarding mergers and acquisitions. In my opinion, there are valid reasons to be cautious about M&A at this time. This relates back to our unique position in the market. Some of our competitors are experiencing significant challenges with driver and technician turnover, facing wage inflation, and having difficulties securing capital equipment, which is not the case for us. Additionally, they lack a sustainability service offering that is increasingly in demand. These factors are why we will not pursue high multiples to acquire such companies.

And our next question is from Tyler Brown of Raymond James.

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 takes there. I'm thinking about things like fuel, commodities, maybe the tax credits maybe that would have influenced it year-over-year because with 9% core inflation and, call it, a 5% to 6% yield, were core margins down?

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 credit first because that really gets us focused on the rest of the business and how we've performed. And that was 30 basis points. And so when you look at Q1's performance, you can see that we were 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 points 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&A beyond expectations. Recycling, this is the brokerage business. It's led by the brokerage business. It includes all elements of the recycling line of business, but that was down 30 basis points on a year-over-year basis. And then the collection and disposal business overall was down 30 basis points. But what's really important to highlight there is that sequentially improved 50 basis points when you remove the impact of the fuel tax credit. 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 to prior year because as a reminder, Q2 of last year was, I believe, an all-time high at 29.3%. 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 first quarter to continue throughout the year.

Okay. So that leads me to my second question. 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 of the 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?

So I'm going to separate fuel tax credits and the impact of rising fuel costs. But fuel tax credit, I would tell you, we hope, is 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 fourth quarter. But we do expect that to be a 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 first quarter. And like I said earlier, at ramp in March, we estimate that the impact of that for every dollar change in diesel fuel is about 20 basis points of margin pressure.

In reference to my earlier discussion with Walter about margins, there is a significant emphasis on pricing, which is appropriate. However, we must also consider the cost component when evaluating margins. For instance, with the digitalization of our customer experience, we have planned not to rehire certain customer experience roles. I discussed this with Mike Watson this morning. We anticipate not replacing approximately 300 positions due to a 50% turnover in some roles at our call centers where inquiries about ETAs, payment statuses, or bulky pickups have been fully automated. Consequently, these positions won't be filled, which we have factored into our plans for the year. Additionally, as we transition from rear load to ASL, we expect that around 2,000 positions may be eliminated over the next four years. While we will add a helper on the truck, our experience shows a 30% increase in efficiency with the switch from rear load to ASL. Furthermore, with the automation of our plants, we expect a net reduction of about 1,000 positions, accounting for both eliminations and new roles through upskilling. Overall, we foresee a net decrease of approximately 1,000 to 1,200 positions over the next four years, with some impacts beginning in 2022 and accelerating in 2023. These factors, along with our pricing strategies, will influence our margins.

I understand completely. So, regarding the pricing question, could you explain the 5.5% collection disposal yield in relation to both your open markets and your more restricted markets? It seems that much of the pricing momentum is currently coming from the open market, yet the CPI linked to the regulated return pricing should pick up as 2022 progresses. You mentioned the high watermark for core price in Q1, but why would it decrease if the restricted segment is expected to grow? Or is it simply not sufficient in terms of numbers to maintain the current pricing levels?

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 half. 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 of the year as our contracts come up, particularly on open market and some of the 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 flowing, 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.

And our next question is from David Manthey of Baird.

First question on labor and benefits, both OpEx and SG&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 health care or anything like that?

I will begin with the operational aspects, and Devina can provide insights on SG&A and benefits. We have discussed labor, which has consistently been a significant issue, experiencing high single-digit to low double-digit inflation. This is particularly evident in our residential line of business, the most labor-intensive area we operate in. Regarding maintenance, I mentioned earlier that if any supply chain disruptions persist through the rest of the year, we may need to utilize some of our older fleet for a longer period while we catch up. However, we don’t view this as a hindrance to capitalizing on the volume and market share opportunities mentioned by Jim; it might affect our operating expenses relative to capital expenditures. As Devina pointed out, it's still early in the year, and we have some time before any adjustments are necessary. This could be a place in the profit and loss statement where the impact may be observed on the operational side.

And then on the incentive compensation and health and welfare specifically, what I would tell you is I do think that incentive compensation could modestly increase 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.

Okay. 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 2/3 of the material that you collect has 0 to negative value. And I'm wondering is that still directionally the case? And as you put in these state-of-the-art automated MRFs, does that percentage change materially?

So David, the MRFs that 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 in upgrading these plants is actually printing better not just because the arbitrage has gotten better, the quality of the product coming out of these facilities is 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, mixed 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. 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. I would tell you in terms of negative value, the one that probably stands, I mean there's a residual content that tracks in the high teens 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. Did I catch all your questions?

And our next question is from Sean Eastman of KeyBanc Capital.

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 first quarter 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.

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 one quarter. And so the overall trend that we expected where our first half comps are just going to be tougher from a margin perspective than the second half comps. Therefore, we will relatively underperform our full year outlook in the first half and see a build as we get into the third quarter 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 to 40 basis point impact, given what we're seeing in diesel fuels, 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.

Okay, that's a fair point. Great answer. Regarding the alternative fuel tax credit not being renewed yet, how does that factor into the full year? What would be the impact if those tax credits are reinstated?

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

And our next question is from Noah Kaye of Oppenheimer.

You mentioned you picked up about $20 million in 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 us 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?

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

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

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 we're 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 is 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 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.

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?

Absolutely. I think for the municipality, you bring up a good point, when you go to kind of the pick up everything at the curb model to a containerized model, it 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.

When considering the returns, Noah, it's quite straightforward. On the downside, an automated side loader has a higher capital cost compared to a rear loader, approximately $60,000, which is about 20% of the vehicle's cost. However, the upside includes a helper that assists during operations, which brings ongoing benefits, whereas the capital cost is a one-time expense for the vehicle's lifespan. Additionally, there’s a safety improvement and a 30% increase in productivity or efficiency, as we are able to collect 30% more homes per hour with an automated side loader than with a rear loader. Therefore, the financial logic is very strong, and it encourages us to proceed quickly.

And our next question is from Michael Feniger of Bank of America.

Regarding pricing, you pointed out Q1 as a peak time. In looking at 2020, with your core price yield dropping from 5.5% to 4%, why wouldn't we expect those figures to be higher in 2023? Should we anticipate a change, perhaps a decrease in activity in the open market as the restricted reset rises next year? I'm trying to reconcile the strong performance in Q1, which was a high benchmark, with the expected slowdown in the second half, and how to consider those 2020 figures as we approach 2023.

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 terms of 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 will be another step change in that part of the business a year from now. In terms of our activity on the street, I think it's important to note we're assuming that slowing this momentum down. So we would like to create some decrease in the cost inflation environment that would allow us to view this a little bit differently going forward. And I just want to focus on customer lifetime value. We'll always ensure that we're being data-driven and customer presence in how we push our pricing efforts.

And our next question is from Kevin Chiang of CIBC.

I'll be quick here. Congratulations on a successful quarter. Regarding your comments on data analytics and the demand from larger customers pursuing their sustainability goals, do you charge for this service? Could it potentially enhance your revenue? If not, will it serve as an additional revenue stream? I believe more customers will need to track their Scope 3 emissions and overall environmental impact.

Yes, that's a great question, Kevin. Currently, we do not have a separate charge for it. It's included in our service offering for national accounts. However, it's an interesting idea to consider whether we could charge for it. We've been thinking about the possibility of having separate charges for these data and analytics services. So as of now, it’s a bundled offering, but in the future, we may consider charging for these services individually.

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 about what the market is doing when you're taking share. I suspect the smaller accounts that this might not be a service as 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. So what are some of the other pain points you might be solving for, let's say, smaller accounts that onboard with waste management if it's nothing pricing driven?

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. So we're in that process now where we're digitalizing that entire customer experience and everything can be handled via your personal 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 positions as they attrit, we've made a decision to not replace many of those, and that starts in kind of Q2, Q3 of this year.

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

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

And this concludes today's conference call. Thank you for participating. You may now disconnect.