Good day, and thank you for standing by. Welcome to the WM Third 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 session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Egl, Senior Director of Investor Relations. Please go ahead.

Thank you, Katherine. Good morning, everyone, and thank you for joining us for our third 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'll hear prepared comments from each of them today. Jim will cover our 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 at www.wm.com. 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 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 third 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 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. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on October 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 express 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. Our team delivered strong results in the third quarter, growing adjusted operating EBITDA by 11% compared to last year. The outperformance is driven by the strength and resiliency of our collection and disposal business. In a quarter where the preponderance of macroeconomic discussion is centered around signs of a slowing economy, WM's collection and disposal operating EBITDA grew by more than 12% and margins expanded 60 basis points. Collection and disposal organic revenue growth was 8.8%, elevating quarterly total revenue – company revenue to above $5 billion for the second consecutive quarter. The growth we delivered was driven by steps to grow revenue and efficiently manage costs, which together, position us to overcome inflationary pressures. Our solid results through the first nine months of the year position us well to achieve the updated guidance provided last quarter, even with a recent downturn in recycling commodity prices. An important contributor to our improving trend in operating expenses and overall cost structure is the strategic decision to leverage automation through the tight labor market and high attrition. John will touch on this as he discusses our significantly improved turnover in more detail. By the end of 2022, we will have reached almost 1,000 full-time positions in difficult-to-source job categories that we've chosen not to refill, putting us well on our way to reducing our labor dependency by 5,000 to 7,000 jobs. We're pleased to see early benefits from our investments to reduce our cost to serve while also differentiating WM by enhancing the customer experience. Continuing on this discussion of our 2023 and beyond strategy, we're very pleased with our investments we're making in both renewable natural gas and recycling businesses. On RNG, we continue to make great progress on building out our new plants as we expect 2023 to be the heaviest capital investment year. We're on track to see meaningful earnings contributions from 2022 and 2023 investments in 2024, with full incremental operating EBITDA contributions coming in 2026, which are conservatively estimated at $400 million. Our recycling business not only provides an important service that our customers want and need, it continues to be a profitable business generating solid returns. We worked hard to adjust our business model over the last several years, and we saw the results of that in the third quarter, particularly in our automated facilities. Our five fully automated MRFs are now delivering differentiated results relative to our single stream network, with about 30% lower labor costs, 13% lower total operating costs, nearly double the operating EBITDA margin and most importantly, a 40% improvement in key safety metrics. We're on track to complete four automation projects and add one new MRF in 2022. The significant investments that we're making in growing and automating our MRF network are strengthening the business by reducing costs, increasing throughput and improving product quality. As with our R&D investments, 2023 will be the heaviest year of capital spending, and the rebuilding of our single-stream MRFs was the biggest increase in incremental earnings coming in 2024 and 2025 as the majority of the rebuild and new MRFs come online. Additionally, as part of our commitment to growing our recycling business, we announced that we are acquiring a controlling interest in Avangard Innovative's U.S. business. The planned acquisition will grow our plastics recycling capabilities by delivering circular solutions for films and clear plastic wrap used commercially. We expect to receive investment returns comparable to our recycling automation investments yet on a more prolonged horizon, given that operations are in the early stages of scaling. We plan to provide a more detailed update during our fourth quarter earnings call once the deal closes. Also on the M&A front, we completed more than $200 million of acquisitions in the third quarter, putting us well on our way to our full year expectation of $300 million to $400 million. We closed two nicely-sized solid waste tuck-in acquisitions in Indiana and Arizona during the quarter. These acquisitions are a complement to our existing operations that we expect to generate solid returns and earnings contribution in 2023. And finally, I'm pleased to share that earlier this month, we released our 2022 sustainability report, providing details on our ESG performance and outlining our new 2030 priorities. These new priorities are strongly linked with our overall company strategy and directly support expansion of our recycling and renewable energy businesses. Even as we celebrate continued progress in our sustainability journey, we're already focused on driving improvements in the future. In closing, I want to thank the entire WM team for their hard work and dedication. We're focused on finishing 2022 strong while continuing to progress our investments in recycling, renewable energy and automation to drive growth. I'll now turn the call over to John to discuss our operational results for the quarter.

Thanks, Jim, and good morning. Exceptional organic revenue growth continued to be a key contributor to our strong results in the third quarter, led by collection and disposal yield of 7.1%. Robust core price across every line of business led to third quarter core price of 8.2%, up 70 basis points from the second quarter. We continue to prioritize customer lifetime value in our pricing strategies, and we maintained third quarter churn of 8.7% when adjusted for steps we took to intentionally shed three large unprofitable contracts. We remain focused on disciplined pricing in the fourth quarter, positioning us to achieve our full year revenue growth guidance of about 10%. In the third quarter, volume remained at healthy levels as workday adjusted collection and disposal volume grew by 1.7%, including special waste volume growth of nearly 15%. Commercial volume adjusted for the contract losses I mentioned was 1.4%. We continue to grow volumes as our team's focus on differentiating WM as a preferred service provider. In addition, our teams in Florida are rising to the challenges from Hurricane Ian, taking care of their teammates and communities. While there were increased costs from business disruption and property losses in the quarter related to the hurricane, we are well positioned to handle storm volume as clean-up activity ramped up in the fourth quarter. We remain focused on controlling operating costs. Adjusted operating expenses were 62.2% of revenue in the third quarter, in line with prior year. And while we still see high single-digit inflation, our operating expenses as a percentage of revenue in the solid waste business improved 70 basis points compared to last year. Over last year, we made significant investments in our people, including proactive wage adjustments, an improved benefit package, and increased training. Those investments are paying off as driver turnover improved by 410 basis points in the past three months, and sequentially, the rate of increase in labor costs improved more than 400 basis points. Repair costs remain elevated and are being impacted by the slowdown in truck deliveries, a tight labor market for technicians, and higher costs for parts and third-party services. The impact of higher fuel costs increased operating expenses as a percentage of revenue by 50 basis points. This increase was completely offset by the alternative fuel tax credits realized in the third quarter related to the first half of 2022. While cost inflation appears to be easing, the inflationary environment only serves to reinforce our commitment to using technology and automation to reduce our labor dependency across the business and lower our cost to serve. As Jim discussed, we continue to have strong conviction in our recycling business. While global markets drive the value of recycled commodities, the steps we've taken over the past few years to shift around 85% of our third-party volumes to a fee-for-service model provides protection on the downside. So while there is a level of earnings variability, the recycling business is profitable and generates solid returns in any economic environment. Our blended average commodity rate in the third quarter was about $94 per ton. We are assuming a blended commodity value of about $50 per ton for the fourth quarter of 2022, which compares to $132 in the same quarter of 2021. These recent commodity market moves, combined with persistent cost inflation, are expected to be about a $50 million year-over-year headwind to operating EBITDA in the fourth quarter. We're very focused not only on managing costs in the recycling business but also investing in automation across our MRF network to structurally lower the cost of processed material and achieve better quality, which further enhances the protections afforded by our fee-for-service model while providing profitability lift even in the toughest markets. In the renewable energy business, we continue to see strong performance with operating EBITDA in the first nine months growing by $24 million. The second of our 17 new RNG plants announced at the beginning of the year is on track for completion at the end of the year and is expected to begin generating revenue in the third quarter following EPA certification to generate RINs credits. In closing, we are very pleased with our third quarter results, and we continue to operate our business with notable focus on disciplined cost control and responsible revenue quality improvements. I want to thank the entire WM team for their invaluable contributions to our success. I will now turn the call over to Devina to discuss our financial results in further detail.

Thanks, John, and good morning, everyone. As we've seen all year, our team delivered strong results in the third quarter, driven by organic revenue growth, diligent cost management, and proactive steps to automate the business. We continue to see improvement in our collection and disposal business as our strategic focuses on fostering a people-first culture and investing in automation are driving nearly tangible results. Adjusted operating EBITDA in the collection and disposal business grew by $174 million in the quarter, which contributed to total company operating EBITDA margin expansion of 50 basis points to 28.6%. Performance in the collection and disposal business, net of fuels, drove 120 basis points of margin improvement. Operating EBITDA margins also benefited by 50 basis points from the passage of the Inflation Reduction Act, which secured alternative fuel tax credits through 2024. These 50 basis points relate to the catch-up adjustment we made in the quarter to recognize the benefits of these credits for the first half of 2022. Partially offsetting these very strong results were headwinds of 50 basis points from recycling commodity prices, 30 basis points from the impact of higher fuel costs, 20 basis points from increased technology and automation investments, and 20 basis points from damage to some of our facilities and vehicles caused by Hurricane Ian. Proactive management of SG&A continues to be an important element of our business optimization efforts. In the third quarter, SG&A was 9.2% of revenue, a 50 basis point improvement over the same period in 2021. Through the first nine months of the year, SG&A was 9.6% of revenue, which is consistent with the full year outlook we provided last quarter. Year-to-date, cash flow from operations increased more than 4%, driven by operating EBITDA growth of nearly 10%. Cash flow from operations growth is muted relative to operating EBITDA growth due to higher cash taxes, higher bonus payments, a delay in cash benefits from alternative fuel tax credits, and some moderation in working capital benefits from last year when we saw significant benefits from our new source to pay system. Through the first nine months of the year, capital expenditures have totaled $1,725,000,000 with just over $1.4 billion of that related to normal course capital to support the business and the remaining $322 million related to the strategic growth of our recycling and renewable energy businesses. As I mentioned in July, we were starting to see some encouraging signs of improvements in truck deliveries, and we're gaining traction on our sustainability investment project. These early indicators continued throughout the third quarter, and we're pleased with the increased pace of capital investment that our teams have secured. We currently expect this accelerated rate of capital to continue in the fourth quarter, positioning us to finish the year on plan for capital expenditures. Turning to our 2022 outlook. Our solid operational performance in the first nine months of the year positions us to achieve the guidance we provided last quarter. We continue to expect revenue growth of approximately 10% and adjusted operating EBITDA within the range of $5.5 billion to $5.6 billion, which represents an operating EBITDA margin of 28.1% at the midpoint. Our operational performance puts us on track to achieve our free cash flow guidance of greater than $2.15 billion. However, in the fourth quarter, we now anticipate making an additional cash tax payment of about $100 million related to a 2017 matter. Considering this payment, we expect 2022 free cash flow of between $2.05 billion and $2.15 billion. When we combine all of this together, we're pleased to report results that meet or exceed expectations across all key financial metrics. Combining this strong performance with the stability and certainty afforded by a healthy balance sheet, we have confidence in our ability to deliver on strategic priorities through the uncertain economic backdrop. At the end of the quarter, our leverage ratio was 2.65x and 19% of our debt portfolio had variable rates. In conclusion, we are very pleased with the company's performance in 2022. We have strong conviction that the investments we are making in growing our sustainability businesses and in using technology and automation to optimize our business are setting us up for future success. The team remains hard at work on delivering a strong finish to the year and setting a solid foundation for 2023. With that, Katherine, let's open the line for questions.

Our first question comes from Tyler Brown with Raymond James.

Jim, just to start, I know you guys mentioned that you broadly maintained the guidance for the full year. I think that included the EBITDA of $5.5 billion to $5.6 billion. But obviously, that's a pretty big range with one quarter left. I know we've got a lot of movement in commodities. We've got a weak Canadian dollar. Are we kind of tracking more towards the low end of that range? Just any help would be appreciated to kind of tighten up that range.

I believe we are still around the midpoint of our guidance. It's a wide range of $100 million, but we feel comfortable with the midpoint. Obviously, some of this will depend on developments in Florida. Overall, I anticipate a slight positive impact for the year, but it might actually lean towards a minor negative. We expect costs for the third and fourth quarters combined to be about $20 million. Currently, we estimate a benefit of about $15 million, but that figure may change. This will influence our final positioning within the $5.5 billion to $5.6 billion range. Thus, I would say it leans slightly negative based on what we know now, but that number is likely to fluctuate. That’s why we believe reaching the middle of the range is attainable.

And then, Devina, I know it's just maybe a little too early to give too much. But when we start thinking about some of the puts and takes on free cash flow next year, number one, can you just kind of remind us what your floating debt mix is? And at current rates, is that a headwind? Two, how do we think about cash taxes in light of this $100 million payment? And three, will some of the incentive comp bonuses be paid, will that be a headwind or a tailwind as we think about '23?

Yes. That's a great question, Tyler. And I think in order to frame it the right way, I'd focus on how we finish 2022, and 2022 has been a fantastic free cash flow year for us. And really, we start that and look at it most importantly on EBITDA strength. When I look at what we expected for the year, we were expecting a $300 million to $400 million increase in EBITDA on a year-over-year basis, and we're going to knock that out of the park and finish the year. We've already achieved $371 million of EBITDA growth through nine months. And so when you think of the fact that we should deliver another $100 million to $200 million of growth in the fourth quarter, it really does speak to the strength of the year. When we look at the headwinds though for the year ahead, it really is what's creating a little bit of noise in our 2022 free cash flow. Interest and tax is leading the way but there is some working capital noise as well. On the interest and taxes line, we now expect a headwind on a year-over-year basis of about $250 million. We started expecting that headwind to be $75 million to $125 million. And when I look ahead, the fourth quarter payment I mentioned relating to the 2017 matter really doesn't do anything to change the trend of cash taxes. But the trend of cash taxes will be impacted by the step change in bonus depreciation. So there's a 20% reduction in the amount of benefit from bonus depreciation in the year ahead. That will create some sort of impact. I haven't yet quantified that. We'll give you more color on that in the fourth quarter. Interest, on the other hand, will be more significant. As I mentioned in my prepared remarks, about 20% of our debt is at floating rate. When I look at that, combined with the rate resets on maturing debt, you've got about $2.2 billion of our debt balances that will be exposed to some rate reset in the next 12 months. We're currently projecting that could be about $100 million headwind in the year ahead, but more color because, candidly, that number has changed very dramatically in the last three months. Three months ago, I was looking at a $40 million annualized headwind. So to see that move that much in just a three-month period is quite significant. On the working capital side, through nine months, we've had a headwind of $22 million from not having cash from the alternative fuel tax credits. Right now, we expect that to normalize. And for '22 to '23, there should be no impact from that whatsoever. On the incentive comp side, that's a headwind this year of about $40 million. Incentive compensation is expected to be higher for '22 performance than it was for '21, so there could be an incremental headwind for that in the year ahead, but I don't have specific amounts to share. All in all, what I would say is the below-the-line headwinds are offset substantially by that growth that we're seeing in the EBITDA of the business, particularly from strong solid waste performance. And as we continue to make capital investments in sustainability businesses, there will be noise associated with what that total free cash flow number looks like over the long term. But we expect to see growth in core solid waste performance that tracks to those long-term trends and even exceeds the long-term trends that we've set forth.

I'm sure there'll be some talk about pricing, so I'll go ahead and turn it over.

And our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

Tyler just teed it up. Why don't we talk about pricing? This year, some of the strongest pricing we've really seen. How are you thinking about pricing in terms of a trajectory into '23? I know some of that's already just based on the inflation this year sort of locked in. Just how are you thinking about the trajectory there?

Pricing remains a crucial factor for our revenue. All our business segments show considerable pricing strength. Our commercial yield is nearing 10%, with industrial at 9.81% and residential at 6.3%. I anticipate that pricing will remain a significant contributor to our earnings. Over the past year, we've utilized pricing as a strategy to address inflation, mainly recovering costs. My goal is to move beyond cost recovery to achieve margin expansion, which will be the focus of our pricing strategy moving forward. We expect inflation to decrease somewhat in 2023. When asked last quarter about the ideal inflation number, I stated it shouldn't be 9%. I expect us to start applying more pricing for margin expansion rather than solely for cost recovery, which we've had to do to cover cost inflation. It's worth noting that while solid waste performance was strong, the positive surprise for us was the volume. Collection and disposal volume increased by 1.7%, despite some challenges like the hurricane. This growth is particularly impressive given the current economic uncertainty. Recently, special waste volume was up 50%. Overall, our volume remains robust, which I consider a positive development. I believe this is likely due to a combination of factors: despite significant pricing, we are gaining market share, and our service is outperforming competitors.

I wanted to ask also about the commodity basket. I know you talked about it and sized it in the prepared remarks. But could you just remind us, I guess, I know you have in the past had some sort of sharing agreements with customers to mitigate exposure to commodities. I guess what percentage of contracts have that or however you think about sort of the mitigation of being exposed totally to the price? And I know you have the recycling brokerage business. And does that sort of mitigate you as well? And I guess outside of OCC, which commodities are you most exposed to?

So Toni, on the brokerage piece, we've always said that certainly augments what we do in our – in the piece of the business that we actually process the material. And that's low margin, no capital, but from a return standpoint, it makes a lot of sense and helps us leverage our ability to move all the materials. So we still feel good about that business. From a marginal standpoint, it actually abates from the margin as prices go down. On the traditional side, we've talked about how we protect the business on the downside two ways. One is floor pricing for some of the fiber grades that we have, and that's certainly something we consider when we're talking about the movement in fiber prices and how it affects the overall P&L. The second piece is really what we've done from a fee-for-service model over the last couple of years. And I think the takeaway is, while we're showing some variability and profitability at these prices have taken such a precipitous drop, and it's really mostly the fiber side, the takeaway is the business is still performing well. We're still happy with it. It's making money and it's not changed our long-term view of what we're going to do on the recycling business.

Yes. Let me add there, and that is to give you a little bit of insight into what we've done with these contracts, just to put this in perspective, if – when the price drops from $110, and this is our bucket of commodities, dropped from $110 to $100, the impact on that is about – on earnings, it's about $8 million, $8.1 million to be exact. If the price were to drop from $50 to $40, the impact is only about $3 million, a little bit more than, a little maybe $3.5 million. So you can see that as price drops, the negative impact on EBITDA really starts to slow. And that is representative of all the changes we made contractually over the last five years. And to John's point, even with a significant drop-off in price for the third quarter and expecting that in the fourth quarter, too, that we still have the ninth best recycling quarter in our history for Q3. I don't think we would have been saying that five years ago.

Our next question comes from Jerry Revich with Goldman Sachs. Your line is open.

I'm curious about your thoughts on collection and disposal pricing moving forward. Given the challenges in recycling, do you believe we need to increase prices in the collection and disposal segments to counter the over $100 million impact on EBITDA from recycling into next year? In other words, do you have the necessary components in place to maintain profit margins as we consider what the next 12 months may bring?

Yes. I mean, I kind of think of them a little differently. They're such different businesses from a price perspective. I will say this about price in the solid waste business. I feel like there's room for price increases. Jerry, we went for almost 15 years with kind of nothing. I remember talking about 1% price, 1% volume many, many years ago. So the business really went for quite a long time without getting any price increases. And yet now all we're doing is trying to recover this, as I said, this four-year high inflation. I think in the core business, in the solid waste business, you'll continue to see us use price in a significant way to cover cost but also improve margins. At the same time, as John and I have discussed, taking cost out of the organization, taking advantage of this tight labor markets through attrition, we saw a fair amount of that in '22. We'll see more in '23 and '24.

I think the other thing I would point out on the margin side, Jerry, is if you look at Q3 of 2022 as a barometer of how we're performing, we talked about solid waste improving on a year-over-year basis by 120 basis points based on where we are today. And the impact from recycling commodity prices being 50 basis points of an offset to that. And we're really happy to say that we delivered 28.6%, so I think that's a great indicator of where we're starting '23. And so that's with the headwind of recycling almost fully baked in. And so I think we're set up well with where the pricing levels are today. And then we have continued expectations for price based on the rollover of our index pricing that happened in the first half of '23 that sets us up well there too.

Our next question comes from Noah Kaye with Oppenheimer. Your line is open.

First, just a little bit of housekeeping on the recycling impact in the quarter. Can you maybe help us understand, was there anything in the timing of how quickly the basket dropped in the quarter that impacted your profitability versus, say, a normalized run rate? Because it does seem like the decrementals were a little bit higher maybe in this quarter than what you are talking about even for 4Q or on a run rate basis.

Yes. I think that was certainly the precipitous drop, particularly in the fiber markets. There's a little bit of lag there so you'd argue there was a little bit of an outsized impact on the quarter. I think what I would point to, Noah, is we looked at the – not just the sequential but the quarter-over-quarter change in pricing and how that affected the overall EBITDA headwind. And I think what you're seeing is resiliency in the business that we would, to Jim's point, we wouldn't have seen four or five years ago. It's still a profitable business. And if you look at kind of the old calculation of what this $10 a ton means, we've certainly separated from that. You can see that in what we did in Q3 and you can see in Q4 going from $130 to $94 produced a $36 million headwind. And for Q4, we're seeing $50 a ton going from $131 to $50 is a $50 million headwind. And as I pointed out, it's still a profitable business. So I think we've achieved a big part of our goal. But specifically on your question, because of the precipitous drop, there's probably a little bit of a lag there.

Yes. And I just want to clarify, I think someone earlier talked about a $100 million headwind from where recycling is at today going into 2023. If we just sort of levelize today. Is that math correct? I think Jim had mentioned the decrementals would actually get even better as we get to lower levels here. So if we just take today's basket price and say, okay, here's where we're at for 2022, as we enter 2023, do we have a $100 million headwind or should it be something less?

Yes. No, I don't think it's going to be $100 million. A lot of it is if we had a crystal ball where the price is going to look like. And we have a view of what pricing will do. And I think you'll see a little bit of improvement from Q4 to Q1 and then sequentially throughout the year. The level of improvement is really what is going to drive that answer. But I don't think even in this environment, it's quite $100 million.

And one quick one on pricing and churn, if you don't mind. You talked about kind of continued headroom for pricing. That certainly makes a lot of sense. Can you talk a little bit about kind of the current customer discussions and whether you're starting to see any greater pushback on price? It would sort of point to some of the macro concerns that people have been raising.

Yes. If you look year-to-date and even quarter-over-quarter, you can see the improvement that we've made both in core price and yield. But we didn't talk too much about it but it's a good spot. When we look at a, we're still growing volume in commercial, industrial when you take out a little bit of the noise I mentioned in my prepared remarks. The residential piece, again, we've got a strategy there that we've employed over the last couple of years. But the other thing we look at is obviously what's going on in Net Promoter Score, customer receptivity, the pricing. We're looking at churn. We're looking at holdbacks, and holdbacks actually improved quarter-over-quarter. So all indications are that the pricing activities we're engaged in. And we've taken a much more strategic look at that over the last handful of years and use some tools that we didn't have a handful of years ago. And I think that's why you're seeing the uplift in pricing performance without really conceding our ability to grow volume and take some share.

Our next question comes from Michael Hoffman with Stifel. Your line is open.

If we could come back to price, has core crossed the lines of business and yields peaked yet? And if not, when do you think you start hitting a peak?

Did you inquire if core price has peaked?

Yes, right. Yes, core price and then the conversion to yield, which, by the way, you had a very good conversion to yield this quarter. It's improved each quarter. So I'm trying to understand the core and yield overall and then that conversion ratio, has it peaked?

It's a tough question to answer just because I don't know exactly what happens with inflation. But what we did say is we expect inflation probably starts to come back down, which then would imply that core price has peaked. If inflation went to 15%, which nobody expects, then I would tell you the answer is no. So for now, I think you could say that core price has peaked. I think the most important aspect though of pricing is the point that we've made a couple of times, which is instead of just recovering costs, we'd love to be able to have a little margin with price. And for most of 2022, it's been kind of fighting this inflation battle with pricing.

Your point on the conversion of a core price seller to a yield dollar is a great one. And I think it goes to what John was speaking about just recently on customer receptivity rollbacks churn. And we do really think that all of that is being benefited by was a tough operating environment right now, and the hard work that the men and women who pick up the garbage for all of our communities every day are doing. It's a tough labor environment. Operators are seeing challenges, and we are differentiating our services and continue to be a go-to service provider. And so when price is most affected in translating to yield, it's when we hold on to existing customers. And because our service levels are differentiated and because small competitors are having a hard time meeting the needs because driver availability has been a challenge, we are holding on to more and more of our customers and differentiating ourselves each day. And I think that will continue to be a strength for the business in the year ahead.

So, the connection here is that your entry price for 2023 should essentially mirror your exit price for 2022. You mentioned a point regarding volumes, and I would like to understand if I am on the right track with you estimating around 8 before the M&A rollover. I am also interested in your current perspective on the M&A rollover. Meanwhile, costs are expected to decrease. I believe there is a particularly large spread forming between the reported price and the actual costs that will materialize throughout the year, which could result in above-average margins. Devina, you pointed out that we should start with a baseline of 28.6%, and there is potential for improvement from there. If that’s the case, then it seems like we can expect significant margin expansion in 2023. Am I interpreting this correctly?

I think when you think about the solid waste business in isolation that is absolutely correct. We have talked about the recycling line of business and the headwind increase, and that will be a drag on margin, particularly in the first half of '23. But I think your overall thesis about pricing and exiting '22 and crossing over into the beginning of '23 is the right one. And the flow-through of that to earnings expansion, to Jim's point about wanting to see more of that really start to be more than accretive rather than just covering our cost. I think we'll start to see better traction on that in '23. I'll give you two data points because I think you kind of asked for them in your question, one being the rollover benefit of M&A. It was about $200 million of acquisitions during the quarter. That's $135 million of annualized revenue, so the rollover benefit is a little south of $100 million to 2023. And then the other point is on the index pricing. And our index pricing, we look at that, that's the 40% mix. And our current projection is that with the puts and takes between what's CPI-based, which what is fixed and what is capped, we think that that will be at about 5.5% in the year ahead, which is pretty consistent with what we were seeing in the back part of this year. So we're pleased that that gives us strength going into the rollover of overall core price starting in Q1 of '23.

So one last piece on that, then what I'm hearing is sales are up, EBITDA are up somewhere in an 8% to 10% zone based on what you just shared. But based on an earlier question about free cash, free cash all-in capital spending, including above-average growth is probably flat to down, given the headwinds?

All-in capital spending is flat to down? Is that what you said or free cash flow?

I believe we will provide more details in a couple of months. However, to be clear, free cash flow for 2023 is expected to decrease compared to 2022. As I mentioned earlier, 2023 will see the highest capital expenditures for our RNG plants and rebuilding our recycling plants. We are looking at around $1 billion in capital expenditures for these projects, compared to about $500 million to $550 million this year. This represents an additional $450 million to $500 million in capital expenditures. Therefore, when we consider free cash flow for 2023, it is likely to be lower.

I think just everybody needed to understand that directionally, just so there are no surprises, right? You're going to have a great sales EBITDA trend. Free cash is what it is for all the growth, and then I'm going to get a real nice bump in that free cash come '25, '26?

Yes, that's correct. Regarding what Devina mentioned about index-based pricing, we have indicated multiple times that due to the 12-month lookback on many of these contracts, the two largest quarters for adjustments will be the first and second quarters of 2023. We are anticipating this change.

Yes, okay. And then last thing on the RNG just so I understand this. You have shared that in '21, you get about $40 million of contribution from that, and then you've added new projects in '22. That $24 million improvement is partly spot market rates plus new or is it all new projects?

No. It's some spot market rate increase. As a reminder, RINs pricing in the first half of '22 was really strong above $3. So there was a big piece of that, that was RINs pricing. There was some that was electricity and then some was incremental contribution from project development.

Managing expectations is important. While the $400 million figure is solid, it is primarily back-end loaded because the two main projects driving this are at a later stage in the development cycle. There are several smaller projects at the beginning and then a couple of significant ones later on. It's crucial for everyone to keep that in mind.

That's correct. In 2025, RNG is expected to really take off due to many projects coming online in 2024, with a significant amount of capital expenditure occurring in 2023. If we consider the flow of cash, it essentially began in 2022, with the biggest capital expenditure outflow for RNG plants occurring in 2023. However, there’s some lag in construction. I believe 11 plants will become operational at various times throughout 2024. The major cash inflows will begin in earnest in 2025, and we'll reach full operational capacity in 2026 for RNG, while recycling will ramp up a bit sooner.

And then I realize you're still in budgets, Devina, but you shared with us bonus depreciation change like. How do we think about the effective tax rate for next year? Is it up, down, flat?

Effective tax rate, we've guided at around 24.5% generally. I expect it will be a little higher next year. But as we've talked about, I don't have specific.

Yes, I got it. I just didn't need to directionally tune the model. All right. Thank you very much. Nice job on the price, folks. Keep it up.

Our next question comes from Sean Eastman with KeyBanc. Your line is open.

I wanted to just come back to the sustainability growth investment program, how that translates into EBITDA over the next couple of years. I feel like the discussion with Michael there gave us a good idea on the RNG piece, just as we think about when these projects are kicking in. But then if we move over to the kind of recycling automation side, maybe help flesh that part of it out a little bit. And then even beyond the sustainability element, my understanding is there's another automation bucket in terms of more back-office elements. And understanding how that kind of EBITDA benefits flows into the model in terms of timing. Anything around this would be very helpful.

I'll address part of it, and then John can elaborate. You've mentioned our strategy, which focuses on reducing labor dependence while leveraging the tight labor market and attrition. This strategy includes potentially eliminating 5,000 to 7,000 positions, which we've detailed. Some of these reductions are linked to recycling efforts that could achieve a 30% to 40% decrease in labor costs, primarily through third-party pickers. As John mentioned, third-party services have significantly contributed to our cost inflation over the past year. In terms of customer experience, our call volume has decreased by nearly 27% year-over-year, indicating improved service. We are also using technology to manage our customer experience, enabling us to not replace some positions even with high attrition of nearly 50%, which presents a staffing challenge but also an opportunity to leverage the technology we've implemented. By the end of the year, we anticipate not filling about 1,000 jobs, with the potential to reach between 5,000 and 7,000 over time. Regarding our recycling investments, there are three main avenues for improving earnings. The first is the significant reduction in labor costs, along with enhanced quality at our facilities and increased processing capacity. For instance, one of our Wisconsin plants aims to boost its throughput from 12,000 tons per month to 18,000 tons, marking a nearly 50% increase. We believe the EBITDA improvement may materialize sooner than expected for recycling initiatives compared to RNG, with full operational capacity for RNG anticipated by 2026, while we aim for 2025 with our rebuilds. Fortunately, we've not encountered significant supply chain issues for equipment. Additionally, we're constructing new plants where necessary, taking a careful approach considering current low commodity prices. We expect considerable capital expenditures in 2023, with EBITDA improvements anticipated in 2023, but the most significant uptick is likely to emerge in 2024 or 2025.

We have a question from Walter Spracklin with RBC. Your line is open.

So my question is related to what you and the team discussed regarding your contracts on the recycling side and how you've managed to limit the negative impact on EBITDA when commodity prices decline. As the industry consolidates and the demand for recycling increases, along with your mention of improving recycling margins to align with your average margin, I'm curious if there's potential for further adjustments to your contracts. Given the increased earnings volatility tied to commodity prices from recycling and natural gas energy conversion, could you implement changes similar to how transport companies handle fuel surcharges, passing price fluctuations on to customers? Is it possible to envision a purely fee-for-service model that would mitigate your exposure to commodity prices through some kind of surcharge program that could be incorporated into your current pricing? I’d like to know your thoughts on potential contract modifications that would facilitate this.

So Walter, we have discussed this in general, but specifically addressing your question, that's reflected in our results. When you examine the numbers I mentioned regarding Q3 comparisons and the Q4 forecasts, a few points stand out. Firstly, that business is still delivering strong margins and excellent returns. We have highlighted the returns from the recycling business, focusing on more than just EBITDA margins. The reason for this performance is that we've adjusted approximately 85% of our third-party processing agreements, leaving us some additional room for improvement. The approach we've adopted includes revisiting our revenue structure and combating contamination, utilizing various revenue strategies to ensure our processing plants are perceived purely as processing facilities. We expect to be compensated for our processing work, alongside obtaining a fair early revenue share before delving deeper into the revenue-sharing model. Although none of us are pleased about the recent decline and its severity, we acknowledge that our recycling operations at our MRFs continue to generate solid returns, cash flow, and margins. This reinforces our long-standing confidence in investing in automated capital, which is not primarily driven by commodity fluctuations. Such investments are aimed at reducing operational expenses and positioning us to maintain business growth even during challenging market conditions.

Our next question comes from Michael Feniger with Bank of America. Your line is open.

Just to clarify, the $50 a ton assumption in Q4, Devina, is that what your basket looks like in October or is that assuming maybe some recovery in November, December to get to that $50 a ton number?

It's a projection of our blend over the three-month period, and there has been basically a continued decline, so we projected that.

Regarding RINs, they are currently at 250. To clarify the situation, their contribution this quarter was flat, but they have been positive on a year-to-date basis. If RINs remain at this level and decrease further in the first half of next year, will this pose a challenge to EBITDA in 2023? Or could some upcoming projects mitigate that impact? I just want to understand how having RINs at 250, which is lower than the strong RINs we experienced in the first half of this year, affects our outlook for 2023.

That's a great question, and you're thinking about it the right way. Because RINs have come down from the highs we saw in the first half of '22, our current outlook for '23, although preliminary would be that you could have some EBITDA headwind associated with the market prices. The offset, as Jim's talked about, for earnings growth associated with new plants coming online doesn't really start to materialize in any material fashion until more like 2024. So 2023 still meaningfully construction-oriented, not significant impact from new capacity.

And Jim, a while back, you laid out these targets, revenue growth 4% to 6%, EBITDA growth 5% to 7% with a cost inflation of 3 to 4. When you look today with the cost inflation, obviously high, what should we kind of be thinking about these ranges and what cost inflation could kind of look like for 2023, since that cost inflation is one of the factors you were talking about that kind of drives your guys' pricing decisions in the open market?

Yes, Michael, I mean we're going through that exercise right now, looking to see what costs look like for 2023. We have some pretty aggressive goals we've discussed internally. And I think there's 5,000 to 7,000 positions that we will choose not to refill. With technology, that helps us get there. The pushback on that on the other side is inflation. And so hopefully, we get a little bit of help from inflation that starts to come down. But we do feel like the business can run at a lower cost structure, whether it’s an operating cost structure or an SG&A number. When you heard Devina talk about the SG&A number for the quarter, which at 9.2%, I don't know that anybody would have thought about that number for a quarter a few years back. And so it's pretty impressive that we're there. Some of that is attributable to some of these positions that have come out. It's a little bit of kind of both categories, OpEx and SG&A, where these positions have come out over 2022. But we do think that cost and cost efficiency is going to be a very important part of our strategy going forward.

And of the three that you articulated, Michael, the most important of those is the EBITDA growth outlook. And if we look at 2022's performance, that traditional range that we guided to of 5% to 7%, we have meaningfully exceeded that in a year where this business grew organically, and it was managing the toughest cost environment that we've ever seen. And so we're really pleased to see EBITDA dollars up 11% in the quarter. So we're revisiting what that long-term range should be.

And our next question comes from Dave Manthey with Baird. Your line is open.

Sorry, I jumped on the call here a little late. But if you covered these, I can follow up offline. As we're looking down the cost stack here, just a couple of minor questions. You may have commented already, but on hiring and retention, what type of labor inflation are you seeing currently kind of on a per person basis before these productivity-related attrition trends and so forth? Can you just talk about that? And then second, wondering about maintenance and repairs. I'm not sure if you manage that top down or bottom up, but are you seeing any delays there because parts or labor shortages? And any kind of update you can provide on the level of routine maintenance activity today.

Yes. They're great questions. And basically, from a wage inflation perspective, a year ago, we were at around 11%. We've seen that come down to about 7%, so that's that 400 basis point improvement that we're talking about. Very happy to see where we are today, and we think the proactive steps we took a year ago are paying dividends today. On the repair and maintenance side, I would tell you, we manage it both top down and bottom up. We also side to side. We manage it in every direction, and it's something that we have collaborative approaches on across the business. And it's the toughest cost category for us. And it's got a lot of different factors that result in it being so difficult, one being delayed trucks, and that's one of the places that we really need to see some traction on, and we're working with the manufacturers to be sure that we get the trucks that we planned for when we expect them. The other things that are happening are technicians in the marketplace are very valuable across the transportation space. And so making sure that we are the preferred employer has been a priority. We have made investments there and we'll continue to invest in the future. Aside from that, the things that are really driving increases are commodity-based inflationary pressures that we've seen on lube and parts and supplies. And we are seeing some moderation there that gives us some hope that in 2023, there will be some moderations on the high levels we saw in '22.

And there are no other questions in the queue. I'd like to turn the call back to Mr. Jim Fish for closing remarks.

Okay, thank you. And I do know that some of our Florida team are on the call listening today, and I just want to let them know how proud of them we are during this recovery from Ian, a tough hurricane particularly with the storm surge coming in as much as it did. And we did lose property. We've talked about that. Our folks lost some property as well. Fortunately, everybody was safe. Everybody on the WM Florida team was safe. And you should all know that we're standing right next to you and standing next to Floridians in general during this recovery. So thank you, though, for your efforts throughout this, particularly there in southwest Florida. Thanks again to everyone for joining us today, and we'll talk to you next quarter.

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