Earnings Call Transcript - WM Q2 2023

Operator, Operator

Good day. And thank you for standing by. Welcome to the WM Second Quarter 2023 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.

Ed Egl, Senior Director of Investor Relations

Thank you, Michelle. Good morning everyone and thank you for joining us for our second quarter 2023 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 at www.wm.com. The Form 8-K, the press release, and the schedules to 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 otherwise stated, 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 second quarter of 2022. Net income, EPS, operating EBITDA, margin and operating expense and margin results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operation. These adjusted measures in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release 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 PM 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 July 26, 2023, 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.

Jim Fish, President and CEO

Thanks, Ed, and thank you all for joining us. Our team continues to advance our 2023 priorities, including increasing the profitability of our business through strong price discipline and an optimized cost structure. As I said in February 2023, it will be a year of pricing and cost control. It's a year of continuing to set ourselves up for the long-term by delivering on what we can control. In the second quarter, our adjusted operating EBITDA margin expanded 60 basis points, driven by pricing in the collection and disposal business and diligent SG&A cost control. We delivered this result despite some things that we can't control: stubborn cost inflation, slower event-driven volumes, and lower than expected renewable energy prices. Notably, clean-up volumes from Hurricane Ian came in significantly lower than anticipated which had a $9 million operating EBITDA impact in the quarter. We're pleased with our pricing results for the first half of the year as our team is executing well to ensure that our pricing is keeping pace with the pressure from rising costs. Overall, our volumes are also tracking at or above our expectations, though the mix of volumes across our businesses is different than we planned. Event-driven landfill and industrial volumes in the quarter were lower than we anticipated, which we see as a short-term moderation in this business. Some customers seem to be taking a more cautious wait-and-see approach regarding the timing of large jobs, given the economic backdrop, with many anticipated projects moving into 2024. Our pipeline remains strong, so we view this as a temporary shift in project timing. The impact to our special waste and construction and demolition volumes has been mitigated by strong growth in our strategic accounts business where we continue to differentiate our service offerings. We're overcoming margin pressure from this temporary change in volume mix with continued momentum in pricing, optimization costs and efficiency improvements. And you'll hear more from John and Devina about the success we're having in managing our operating costs and SG&A where we had opportunities ahead. Turning to recycling, we're now expecting a slower-than-planned recovery in recycled commodity prices in the second half outlook. The investments we're making in automating our recycling facilities position us well in any commodity market environment as they drive lower labor costs, processing costs, improved efficiency and enhanced material quality. In the second quarter, our fully automated recycling facilities delivered differentiated results relative to the rest of the network with 33% lower labor costs per ton and 18% lower total operating costs per ton. During the quarter, we're pleased to have opened a new recycling facility in the Greater Toronto area and also completed technology and automation upgrades at an existing facility in Arizona. Recycling is a service with strong customer demand and our intentional shift to a fee-for-service business model, as well as our high-return technology investments, make it a profitable business for WM in any economic environment, with margins now well above our prior commodity cycle lows. On the renewable energy front, we opened our Eco Vista renewable natural gas facility in Arkansas during the quarter, the sixth WM-owned RNG facility and the second of our 20 planned projects in our sustainability growth program. Last month, the EPA announced its three-year renewable fuel standard rule, which provides strong demand and visibility to the market for renewable fuel standard credits, or RINs. This robust demand provides support for our blended average pricing assumption of $26 per MMBtu used to develop our investment strategy and strengthens the case for potential upside. Shifting to our full year outlook, we're updating our 2023 guidance ranges to consider first-half results and a slower recovery in commodity prices in the second half of the year. We now expect an adjusted operating EBITDA growth of 5.7% to the midpoint of our guidance range, which is still well within the 5% to 7% long-term growth range that we provided in May of 2019. The WM team continues to step up to the challenges of each day, while at the same time, progressing investments in our business that positions us to further differentiate our industry-leading asset network and capabilities and reduce our cost structure. I want to thank each of our team members for their hard work and dedication. I'll now turn the call over to John to discuss our operational results for the quarter.

John Morris, Executive Vice President and Chief Operating Officer

Thanks, Jim, and good morning. Pricing remained a bright spot in the second quarter as we continue to execute on our revenue management programs to recover cost increases and improve margins. Our second quarter organic revenue growth in the collection and disposal business was 6%. This growth was led by core price of 6.9% with collection and disposal yield of 5.8%. We have and continue to emphasize the importance of post-collection pricing, and in Q2, we delivered a yield of 7.5% at our transfer stations and 6% for landfill MSW, both improvements in the growth rates from last year. Our team's collective focus continues to be on maximizing customer lifetime value. That focus led to second quarter churn improving to 8.3%. This lower churn has allowed us to convert more core price into yield, driving our full year outlook for collection and disposal yield to increase to more than 5.5%. Looking at volumes, second quarter collection and disposal volume grew by 0.2%. As expected, volume growth was weighted to the landfill line of business with modest declines in the collection business. MSW volumes stood out with an increase of almost 4%. As Jim mentioned, some of our event-driven landfill volumes, particularly special waste tons have been tracking below our expectations and below the very strong levels we saw in 2022. Our collection volumes were down modestly in the quarter due to the intentional steps we continue to take to price every contract to achieve acceptable returns as well as the impact of lower volumes from temporary roll-off. Net new business and net service increases were firmly positive and improved from first quarter 2023 levels, underscoring that commercial conditions remain solid. Though collection volumes are down, both revenue and operating EBITDA grew in each line of business, demonstrating that we are prioritizing profitable volume growth. For full year, we continue to expect collection and disposal volumes to be flat at the midpoint of our guidance. Turning to operating expenses, we realized benefits from our optimization efforts in the second quarter, leading to 20 basis points of improvement in operating expenses as a percentage of revenue to 62.2%. The improvements that we made in Q2 are being partially offset by higher costs due to inflation. While we experienced some impact of lingering inflation into Q2, signs of easing continued as the quarter progressed. The areas experienced the most pressure are labor costs and repair and maintenance costs. There's cause for optimism in both of these categories. Labor costs have continued to moderate during the second quarter, settling in the mid-single-digit range from the double-digit levels that we have seen over the last year. This improvement can be attributed to better employee retention as evidenced by over 50% fewer driver openings and driver turnover improving 250 basis points compared to the same period in 2022. We have robust strategies in place to optimize labor efficiency, particularly in our collection line of business, which we expect to further diminish these cost pressures as the year progresses. We are seeing the benefits of these efforts as we progress through the second quarter, with June marking the lowest cost to serve month of the quarter. This is a promising sign as we move through the remainder of the year. As noted, another significant factor impacting our operating cost has been repair and maintenance expenses. The effects of not receiving a full allotment of trucks over the last few years are still being felt. However, the good news is we are now receiving more trucks and it's leading to improved costs. Since the beginning of the year, our maintenance cost per unit have either improved or remained stable across all collection lines of business. Similar to our approach to labor costs, we have comprehensive plans in place to drive continued improvement in our repair and maintenance performance as we progress through the rest of 2023. Our efforts in these two key areas as well as broader operating expense categories give us confidence that we can continue to improve overall operating costs as a percentage of revenue as we progress through 2023. I want to thank the entire WM team for continuing to provide safe and reliable service to our customers. I know they're all working hard to deliver strong results through the remainder of this year and beyond. With that, I'll turn the call over to Devina to discuss our financial results and guidance in further detail.

Devina Rankin, Executive Vice President and Chief Financial Officer

Thanks, John, and good morning. The first half of 2023 and our revised outlook for the full year is best framed as the story with two primary themes. One of executing well on our top priorities to profitably grow our business, and the other of pressure from market factors beyond our control that we are working to ensure we navigate from a position of strength. Our team's diligent efforts delivered two particularly strong outcomes in the second quarter. First, revenue growth from price and our focus on cost optimization translated into an increase in collection and disposal operating EBITDA of $95 million or 6.2% in the quarter. And second, SG&A costs as a percentage of revenue improved by 30 basis points to 9.1%, and this is the best result in our company's history. Our commitment to managing discretionary spending and investing in automation to reduce our cost of service is paying off. We're seeing strong outcomes from our investment in a customer experience model that leverages technology to communicate with customers in their channel of choice. Customer feedback has been strong, giving us confidence that with these investments we've permanently reduced our SG&A cost structure, and we will continue to drive improved customer satisfaction that will only bolster customer lifetime value from here. Organic growth in the collection and disposal business and our focus on SG&A optimization delivered 50 basis points of operating EBITDA margin expansion in the quarter. Operating EBITDA margin improved 60 basis points overall. So you can see that these two things delivered almost all of these strong results. This is what gives us confidence in our ability to continue to grow margin in the back half of the year and into 2024. Year-to-date, cash flow from operations was about $2.1 billion. As expected, higher cash interest, taxes and incentive compensation payments more than offset the benefit of operating EBITDA growth in the first half of the year. We expect to see those impacts lessen in the second half of 2023. Capital spending in the first six months of the year totaled almost $1.2 billion, with $963 million related to normal course capital to support our business and $217 million of spending on sustainability growth projects. As Jim mentioned, we're pleased with the continued progress on our sustainability growth program with three new projects coming online so far this year. However, customary construction and permitting delays for certain recycling and renewable energy projects will push about $200 million of our planned 2023 sustainability growth capital into future years. Free cash flow through the first half of the year was $940 million, and free cash flow before sustainability growth investments was $1.157 billion. Year-to-date, we've returned $572 million to shareholders through dividends, and we've repurchased $620 million of our stock. Dividends will total a little more than $1.1 billion this year and we expect to repurchase about $1.25 billion of our shares over the course of the year. Our leverage ratio at the end of the quarter was 2.8 times, which is well within our targeted ratio of between 2.5 and 3 times. About 21% of our total debt portfolio is at variable rates, and our pretax weighted average cost of debt for the quarter was about 3.8%. Our balance sheet is strong, and we remain well positioned to fund growth. Turning to our updated 2023 guidance, we now expect revenue growth of between 3.25% and 4.25%. The revision from our initial expectations is entirely related to commodity prices in our recycling and renewable energy businesses and the pace of contributions relative to plan for our recycling acquisitions. The key takeaway here is that core price, yield and volume outlook in our collection and disposal business are intact and even performing slightly ahead of our initial expectations. We now expect adjusted operating EBITDA to be in the range of $5.775 billion to $5.875 billion, which is a $75 million decrease at the midpoint. About $50 million of the revised outlook relates to our performance in the first half of the year relative to our plan and $20 million relates to a slower recovery in recycled commodity prices in the back half of the year relative to our expectations. The operating EBITDA shortfall in the first half of the year primarily relates to three things: inflationary cost pressure that has taken longer to abate in 2023 than we expected; a softening in event-driven volumes at our landfills, and lower-than-expected commodity prices in our renewable energy business. These are market-driven pressures, giving us confidence that our collective performance on the company's top priorities over the first half of the year delivered the intended outcomes. With the strength of our collection and disposal operations and the success from our SG&A optimization efforts, we will again deliver on our target of growing operating EBITDA by 5% to 7% annually in 2023. In addition, we expect to expand our operating EBITDA margin by 40 to 60 basis points for the year. Both measures demonstrate the resilience of solid waste and the benefits of pricing discipline, focused differentiation, and cost optimization to drive long-term growth. In closing, the WM team is delivering well to safely and reliably serve our customers and to optimize our costs. We will deliver another year of strong financial growth in 2023 and position ourselves for continued success on the road ahead. I can't thank our hard-working team members for all of their contributions to our success. With that, Michelle, let's open the line for questions.

Operator, Operator

Our first question comes from Tyler Brown with Raymond James. Please go ahead.

Tyler Brown, Analyst

Hey, good morning. Devina, so lots moving around in the margins, but can you just talk a little bit about that margin walk in more detail? Kind of how we bridge that 60 basis points year-over-year. Maybe talk about fuels, commodity, the CNG tax credit to M&A. I know there's quite a bit in there.

Devina Rankin, Executive Vice President and Chief Financial Officer

Yes, you're right, Tyler, there are a lot of moving pieces. Similar to what we talked about in the first quarter, when you combine recycling and renewable energy prices that had a negative impact to margin of about 30 to 40 basis points, again, the dilutive impact of M&A, this is half recycling and half solid waste was about 40 basis points. And then what we had is an offset from fuel that you didn't see in the first quarter. So we're really pleased that when you look at those two things which are more timing and commodity-related and focus on the real substance of the margin expansion that we produced in the quarter, that is two things, and its solid waste and it is SG&A cost optimization.

Tyler Brown, Analyst

Right. So maybe fuel kind of offset the commodities and M&A. Is that kind of what you're saying?

Devina Rankin, Executive Vice President and Chief Financial Officer

Exactly.

Tyler Brown, Analyst

Okay. Perfect. And then I think last quarter, you guys did talk about 4% to 5% unit cost inflation for fiscal '23. I'm just curious if that number still feels about right or if it is coming in a touch higher? And then how should we think about Q3 margins? Will they be up something like 50 to 70 basis points sequentially and then maybe tick down in Q4, just to help us with the modeling?

John Morris, Executive Vice President and Chief Operating Officer

So Tyler, I'll start, and then I'll leave the second part to maybe Devina. But I would tell you that when I look at probably the best barometer for that inflation question is probably labor. I think the good news, as you heard in my prepared remarks, it continues to moderate. We came down, I think we were right around 6% for the quarter, which is obviously a tad higher than what we had projected in the number that you referenced. But I think the good news is that we continue to see that moderate and it continue to moderate through the quarter as we looked at each of the progressive months as we're anniversarying some of the peak labor increases. The second part would be on the M&R side. And as you heard also in my prepared remarks, the good news is that we're on track to receive about 90% of our trucks this year as opposed to less than half the last few years. So that's another place where we've seen a little bit of persistence in inflation. But as evidenced by my commentary and Devina's, we feel good about the balance of the year and our ability to continue to drive OpEx down.

Devina Rankin, Executive Vice President and Chief Financial Officer

In response to your second question, Tyler, we are confident in our ability to achieve a 29% EBITDA margin in the second half of the year, following a 28.7% margin in Q2. We expect additional benefits from the solid waste segment that John mentioned. Our long-term target is to reach a 29% margin, which is based on 62% operating expenses and 9% SG&A as a percentage of revenue. We believe that we can start to achieve this level in 2024, with potential for further improvement.

Tyler Brown, Analyst

Excellent. Very good. And then my last one, real quick. So Jim, it sounds like the $740 million of incremental EBITDA from energy recycling is intact. You did mention that the timing may fluctuate, and we did have the $200 million CapEx deferral. So at this point, how much incremental EBITDA are you expecting in '24 from those? If I look back at the Investor Day, it was something like $225 million incremental. Is that still the case? Or has that been pushed out a little bit? Thank you.

Jim Fish, President and CEO

Yes. Thanks, Tyler. Look, as far as the end number for both RNG and recycling, which was $740 million, we're still comfortable with that. The interim year was really designed to kind of give some insight into the buildup of that. We knew things would change, whether it was timing of CapEx, supply chain-related, third-party delays, permitting, things like that. So what we'll do is update that number, the 2024 number when we give guidance to incorporate some of those shifts that have taken place over the last few months.

Operator, Operator

Thank you. And one moment for our next question. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open, please go ahead.

Toni Kaplan, Analyst

Thanks so much. You mentioned that collection and disposal will exceed 5.5% this year. We did see a little bit of a decel in 2Q. Can you just talk about what should cause that to sort of accelerate from this level?

John Morris, Executive Vice President and Chief Operating Officer

Good morning, Toni. I would tell you, I think the one thing I would point to is when you look at the conversion rate between core price and yield, that's where we really have seen an improvement as we looked at the first two quarters of the year. And now we're converting close to 85% of what we're putting through in core price into yield, and that's given us confidence that as we go through the back half of the year, we're going to see something better than the 5.5% we originally guided to.

Toni Kaplan, Analyst

Terrific. I wanted to ask a little bit more on the SG&A optimization. Thanks for calling that out. Just any additional color on what's going on there and how much maybe you have left to do with regard to that?

Devina Rankin, Executive Vice President and Chief Financial Officer

Sure. So as I mentioned in my prepared remarks, we've seen really strong traction, particularly in our customer experience part of our back office. And that really underpins the success of our automation and optimization efforts across the business. That's been the most significant driver of the change in SG&A optimization overall. We expect similar things to happen in other parts of our business as well. And so while we're looking at a 9% SG&A number, Jim and I talk about the fact that either of us, if we had said that we could achieve that when we both started the CFO position, we would have told you that was a really hard thing to achieve. So we're pleased to be at this level. How much more room there is in it, it's still to be determined. But what I think you see here is WM's commitment to continuous improvement, and we're seeing success really motivate our teams to figure out how to leverage the success in other parts of our business.

Toni Kaplan, Analyst

Terrific. Thanks a lot.

Operator, Operator

Thank you. And one moment. Our next question comes from the line of Bryan Burgmeier with Citi. Your line is open, please go ahead.

Bryan Burgmeier, Analyst

Good morning. Thanks for taking the question. Just following up on Tony's question, so there's a comment in the press release and prepared remarks about exceeding yield growth of 5.5%. So what level of yield growth do you assume at the midpoint of your revenue guidance now? Is it 5.5%? Or is that above 5.5%, any detail you can have on kind of what's baked into the guidance would be great.

Devina Rankin, Executive Vice President and Chief Financial Officer

Sure. It's specifically 5.6% as we're looking at the midpoint, and that's about a 20 basis point increase from where we started the year.

Bryan Burgmeier, Analyst

Got it. Got it. Thank you. And I appreciate the updated view on the recycled commodity basket. Can you maybe just provide some detail on what the average was during 2Q or maybe where you are in June, July? Just trying to think about how much improvement we need to see in the second half? Thanks.

Jim Fish, President and CEO

Yes, Brian, I'm going to let Tara Hemmer, she's sitting here with us. I'll let her take that for you.

Tara Hemmer, Analyst

Excellent. So our commodity price for recycling for Q2 was $60. And I think what you have going on in the second half of the year is really a tale of two different commodity types. If you think about our fiber pricing, we're expecting a slow ramp in fiber pricing, and that's really being driven by some mill capacity coming online domestically. The bigger story really is on the non-fiber pricing and related to plastics, which is a smaller part of our volume but higher-value commodity. And we've seen prices decline roughly 30% to 55% from May to July. So that's what's driving our recycled commodity price outlook for the second half of the year. And so we're expecting the second half of the year to now be about $60 a ton. So really the same as Q2.

Bryan Burgmeier, Analyst

Okay, got it. Thanks a lot. I'll now turn it over.

Operator, Operator

Thank you. One moment please. Our next question comes from the line of Michael Hoffman with Stifel. Your line is open, please go ahead.

Michael Hoffman, Analyst

Good morning, Jim, Devina, John, and Tara. I was in steaming Houston yesterday. I don’t know how you all live there in the summer. So Devina, what was the value of the assumption for a sequential improvement in all things commodity? So not just recycling, recycling RINs, nat gas, electricity in the original $5.9 billion?

Devina Rankin, Executive Vice President and Chief Financial Officer

We had initially anticipated a $85 million negative impact from commodity prices in our recycling and renewable energy sectors, but that figure is now projected to be around $125 million. This represents an additional $40 million headwind compared to our earlier expectations, with approximately half of that occurring in the first half of the year, primarily due to issues in the renewable energy sector related to electricity and natural gas prices. In the latter part of the year, as Tara mentioned, we are experiencing pressure from lower recycling commodity prices, especially plastics, leading to a $20 million decline in the second half of 2023.

Michael Hoffman, Analyst

Okay. I didn't ask that question very well. You all in your prepared comments, I think, are inferring this, I'm trying to piece it out in numbers. If you got a Mulligan and we went back to February, and you were giving guidance and you didn't have any of the sequential improvement, what would have the midpoint have been? I think it's like $5.7 billion, which means you were raising guidance in 2Q because of the strength of garbage.

Jim Fish, President and CEO

No, I think you're right, Michael. If we had foreseen that commodity prices wouldn’t improve as we initially expected for the latter half of the year, especially with a significant drop in natural gas pricing, we might have provided lower guidance. While we didn't anticipate that electricity and rental prices would also decrease in the first half, we did see improvements in June. If we had known all of this, we definitely would have issued a lower guidance. However, as I mentioned earlier, we are still achieving a 5.7% growth, which falls within our expected 5% to 7% EBITDA growth range. It’s important to note that when we provided this guidance back in 2019, it was based on average commodity prices, and currently, we are operating about 45% to 40% below those averages. Initially, I was a bit disappointed when reviewing the numbers, but then I focused on what we can control. Typically, when we excel in SG&A, pricing, and margins, we expect to exceed guidance. The reasons for our lower guidance are primarily due to unpredictable commodity factors. We based our expectations on historical data, believing that commodity prices would rebound, albeit now looking at a 2024 timeframe. So you’re correct that our guidance would have been lower, but it would still remain within that 5% to 7% range. Overall, I feel optimistic about our performance and believe we are managing the aspects we can control quite effectively.

Michael Hoffman, Analyst

Right. So I'm repeating the obvious, but core recurring collection and disposal is performing as planned or better. That's the conclusion.

Jim Fish, President and CEO

Yes, that's right. I mean actually, I would say, you could argue a little better, right? Devina just talked about SG&A being 9%. I'd tell you, when I was CFO, I mean, I'm sitting there wondering how we get to 12.

Michael Hoffman, Analyst

So she's got bragging rights.

John Morris, Executive Vice President and Chief Operating Officer

So two things, Michael. First, I don't think we're below the baseline. Regarding the hurricane effect, it was a bit of a challenge in the first half of the year, especially in Q2. However, we've managed to clean up a lot since we made predictions last year about Ian. It just had a slight moderation in the first half and a bit more in the second half. For special waste, I've done extensive research and consulted with the team. I believe we are not below baseline. Last year, we experienced historic highs in the first two quarters for special waste, and those were among the strongest quarters we've had since 2017. In fact, Q2 was our strongest recent quarter for special waste. There were just a few events, mostly in the Rust Belt, where we observed a bit of moderation on some large projects. But overall, I'm quite confident about the special waste situation.

Jim Fish, President and CEO

I think it’s important to note that many companies have entered a holding pattern until they gain better visibility on the economy, particularly given concerns about a potential banking crisis. As a result, they have put a temporary pause on some projects for which they have discretion over timing. However, the pipeline remains strong, and we have been discussing this for several quarters. We still have solid customers, but there is currently a halt on certain projects. We saw a decline of 1.9 million year-over-year tons in special waste and RGC for the first half, which is significantly below our budget. Despite these challenges, the good news is that many factors outside our control will eventually come back, and these projects will be completed. Commodity prices will also recover. Thus, I am leaving this conversation feeling more optimistic than one might expect.

Tara Hemmer, Analyst

It doesn't impact it at all. We're confident that we've done the work that we need to do to ensure that we get the benefit of the ITC.

Michael Hoffman, Analyst

And then what is the probability that you can work it up from 30% to 50% based on content and all that stuff?

Tara Hemmer, Analyst

So we're actively looking at which locations can get the energy community benefit, which would take it up to 50% and then also looking at domestic content, which would apply to 17 of the 20. We don't have definitive confirmation there, working closely with Devina's tax team on that, but hope to have some more information perhaps later this year, early next.

Michael Hoffman, Analyst

Instead of spending $1.2 billion, you're going to spend anywhere from $500 million to $700 million.

Devina Rankin, Executive Vice President and Chief Financial Officer

So on the fuel surcharge, the impact was about 60 basis points. Yes, absolutely. So what I think is important is you hear the close coordination that's happening between Tara's team and my team on every aspect of growing this portfolio. And I would say the systems, processes, financial reporting associated with the business is something that we're bolstering at the same time that we're building out the asset network. And so we have expectations that we'll be able to build SEC quality level of financial information in the near term, and that's our goal, and we'll keep working towards it over the course of the rest of this year.

Noah Kaye, Analyst

Thanks so much. I'll pick it up there on the sustainability investments. And to be clear, permitting delays are absolutely nothing new in the RNG industry, and I think we understand why. But I'd be curious for your color on the development environment, to what extent any incremental challenges are presenting either from a permitting or construction perspective? How sort of temporary do you view this in this growing industry?

Tara Hemmer, Analyst

Well, I think it's important to set some context here. We have a large number of projects in flight at the same time, and we're really portfolio-based view. If you think about it, some of them are going to delay. Some of them were working to accelerate. If you think about what's happening in 2024, we'll have well over 10 projects under construction. And so we're working with utilities to figure out how we can advance our interconnects we're working with local permitting agencies to ensure that we get building permits. So a lot of this is, like you said, really normal course. Things that happen on large construction programs and projects, and we're going to continue to evaluate. And that's why later this year, really when we announced Q4, we'll give a bit more color on what the impact will be.

Noah Kaye, Analyst

Okay. And just a follow-up around the RIN assumptions for the full year. Obviously, for the first half of the year south of the original guide, kind of low 2s, RINs being north of $3 now. Is there some sort of impact to the blended average for the year from hedging? If so, can we kind of tease that out? Or could there still possibly be a little bit of upside from where RINs are penciling out today?

Tara Hemmer, Analyst

That's exactly the right way to look at it. So it really is a tale of two halves. And if you think about the second half of the year, with RIN prices now at around $3. You have to remember that we've been selling ratably over the course of the year. So we had some of our volume locked in for the second half of the year. But on a blended average basis, we expect the second half of the year to be more like $270.

Jim Fish, President and CEO

It's somewhat challenging to identify the reasons behind the disparity. There are several factors at play. For instance, the commercial real estate market in downtown areas has seen a decline due to the continued work-from-home trend that emerged during COVID. Looking at the Municipal Solid Waste (MSW) sector, volumes have been quite strong, and what’s more promising is that the MSW prices have improved significantly. Previously, we struggled to achieve higher prices for MSW, but now we are seeing both increased volume and price, which is very encouraging. I’m not particularly worried about the decrease in roll-off volume, as it's partly linked to special waste projects. The commercial volume has remained relatively stable, possibly experiencing a slight decline. The residential sector has intentionally contracted, as we’ve lost a few contracts due to our refusal to meet their demands for retention. Overall, our volume is mostly aligned with our expectations, though there has been a notable shift relating to our national accounts business. I'm pleased to highlight that business is performing exceptionally well, setting us apart, and while it contributes to a different margin compared to our special waste sector, it’s a positive development.

John Morris, Executive Vice President and Chief Operating Officer

The only thing I would add on the front main residential well. And if you look at residential, and you saw it in the back, if you look at the 4% volume versus the revenue improvement, we've seen a similar trend there last couple of quarters, we try and rightsize that business and continue to get those margins up. On the commercial side, I did go back and looked at what printed in terms of the volume. And then you net out some of the franchise impact in addition to one national account loss we talked about that we're actually anniversarying ironically. And at the same time, putting about 15,000 containers back on the street to take that business back, we actually end up about 0.2% positive for the quarter. So there's some noise in there, and that's for the level of granularity, but I think that's why you hear from Jim and I some confidence in our answer to you.

Noah Kaye, Analyst

We appreciate that granularity. Thanks so much.

Operator, Operator

Our next question comes from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open, please go ahead.

Sean Eastman, Analyst

Hi, everyone. Thanks for taking my questions. I just wanted to come back to the confidence in that core 5% to 7% EBITDA growth going into next year. I wondered that just in light of the great pricing story, good signs on inflation from an OpEx trend perspective, more opportunity on the SG&A cost optimization. Is that a conservative range going into next year in light of how the model is setting up over the next 12, 24 months in your view?

Jim Fish, President and CEO

I guess based on this quarter, I wouldn't say it was conservative. I don't know. Look, I think the 5% to 7% that we gave in '19 is a good range. But those components that you talked about, we're feeling very confident in those. I mean, SG&A we've talked about pricing has been a very good story for us and continues to be a good story for us. OpEx, John talked a lot about OpEx today. And while we had maybe a little more stubborn inflation in the front half, we're starting to see some moderation, as you said. We're starting to see things like training hours come down. We're starting to see overtime come down a bit. So we're getting efficiency improvements, cost per unit on maintenance, truck deliveries. All of those things caused us to be fairly optimistic, and Devina mentioned 29% margins as a decent jumping off point. And look, I would say, yes, we've talked about 30% being a number that we felt was achievable for probably the last couple of years. Now we're finally getting to a point where we say, okay, we really do believe that. I mean, we're looking at 60 basis points of improvement in margins in the face of some really strong headwinds that were a bit out of our control. So we'll give you a lot more detail on that as we give guidance. But I would tell you that barring a big downturn in the economy that 5% to 7% still looks like a very good range for us.

Sean Eastman, Analyst

Okay. Thanks for that Jim. And it sounds like maybe stay tuned on this, but in terms of the $200 million of sustainability growth CapEx that has slid, I mean, for now, is it a good assumption to layer that into the prior expectation for 2024, just kind of layer that $200 million on top? Or is that not the right way to think about it? Any sort of preliminary thoughts on that would be helpful.

Devina Rankin, Executive Vice President and Chief Financial Officer

Yes, Sean, I think you're thinking about it the right way. So layering that on top of what we plan for '24 is the best view that we have right now. We'll give more clarity on that when we give '24 guidance. But based on our expectations right now, I think what's important for you all to hear is that the teams are working really hard to accelerate projects where we can because the returns on these are so strong and a three-year payback period means that we want to get these facilities up and running as quickly as possible. So while there are some places where we're seeing delays and deferrals like you said, there are others where we're working to see what we can accelerate. So right now, our best outlook is to layer the $200 million on to the prior outlook for '24.

Operator, Operator

Our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open, please go ahead.

Jerry Revich, Analyst

Good morning, everyone. Jim, Tara, can I ask you your views on the EPA's outlook for landfill gas, really interesting decoupling from other credit classes, so landfill gas really has to ramp up to hit their targets. Based on what you're seeing, do you think the transportation fleet that consumes natural gas was on pace to grow fast enough to absorb those credits? And given the visibility the requirements lay out for your business, how does that impact the potential shadow pipeline beyond the 20 initial projects that we discussed with Analyst Day?

Jim Fish, President and CEO

I'll give a little bit, and then I think I'll let Tara answer the rest of it. I do believe that there is plenty of demand out there. So from that standpoint, I mean, there's been a little bit of discussion I've heard that, well, are you going to kind of run up against a ceiling here in terms of demand. And I think the answer is there's plenty of demand here as we think about the natural gas fleets, for example. I mean our natural gas fleet is about 70% of routed vehicles. So I think, Tara, I'll let you kind of give a bit more detail. But I feel optimistic about the demand side of this.

Tara Hemmer, Analyst

Yes. And just to add a little bit of color on to that. If you think about what the EPA did by setting a multiyear renewable volume obligation, it did two key things. One is they raised the volume, so that provided a strong demand signal. And two, they provided multiyear certainty. And that's something that obligated parties like refiners were looking for, and so are the producers like WM. So we really feel like there's a strong demand signal from that, and it has a halo effect into the voluntary market. We're seeing a lot more interest in the voluntary market, and we're actively working with our teams to figure what's the right way to transact going forward.

Jerry Revich, Analyst

And to that point, given the visibility on a multiyear basis, how are you focusing about the pipeline beyond the initial 20 projects as a result? And are we looking at potentially accelerating the next batch of projects beyond these lines?

Tara Hemmer, Analyst

We absolutely have a pipeline of projects that goes beyond the 20. We haven't yet determined how we're going to approach that pipeline. So we'll provide some more information down the road. But a lot of opportunity when you think about our landfill gas. It's a phenomenal resource and something that we think we can monetize long term.

Devina Rankin, Executive Vice President and Chief Financial Officer

No, I think that you're looking at it the right way to really give some clarity on our revenue guide relative to where we started. The commodity businesses, we expect to be down $125 million in revenue over the course of the year with a lot of that already in the first half and then about $100 million decline in revenue from the recycling acquisitions relative to expectations. So our expectations for the back half are normal with regard to seasonality impacts. The only thing that you could see is we did start to see Hurricane Ian impacting Q4 of 2022, and those will not repeat. Sure. So in terms of the margin cadence, what we were looking at going from Q2 to Q3 in '23 is a typical margin expansion, but the offset will be the timing difference on the alternative fuel tax credit from a year ago. As a reminder, that wasn't concluded from a regulatory perspective until Q3. So we took all of that benefit in Q3 of last year. So that's the one thing that will dilute the margin upswing that we traditionally will see.

Hans Hoffman, Analyst

This is Han Hoffman on for Stephanie Moore. I was just wondering if you could comment a bit on pricing just in terms of where you're kind of exceeding relative to kind of your internal expectations. And then just anything you're seeing from a churn standpoint?

Jim Fish, President and CEO

Yes. We believe we are likely exceeding expectations across the board, which is why our forecast is slightly higher than our initial guidance for both yield and core price. Specifically, we are particularly pleased with the MSW waste stream, which has seen growth both sequentially and year-over-year to a significant extent, as well as with residential. In previous years, these areas struggled to demonstrate strong core price or yield, but now we are confident in their performance, as they are not only achieving impressive numbers but also showing positive trends. I believe valuations have increased slightly. Several smaller businesses are experiencing growth as they emerge from COVID. Many of these companies feel that now is the right time to sell, either due to a lack of succession plans or anticipated labor pressures, which has led to a noticeable rise in merger and acquisition activity. For us, this presents a challenge. We aim to maintain a strong pipeline of M&A opportunities, but we also want to avoid overpaying. Therefore, we will be patient and not rush into deals. I prefer to wait rather than pay a high multiple. I will hold out for more reasonable valuations, unless a seller is willing to negotiate a fair price now.

Tobey Sommer, Analyst

Thanks. I was hoping you could discuss your labor turnover and compensation growth in the second half versus the first half? And then maybe from a longer-term perspective, how does that sort of comp and expense growth interplay with your 5% to 7% EBITDA growth target over the next several years? Do you model it being a little diminishing over that period?

John Morris, Executive Vice President and Chief Operating Officer

So Tobey, I think a couple of things I'll note for you. One, I referenced that labor rates trended at about just over 6% for the quarter. And if you go back a year ago, that was probably 9%, 10% depending on what part of the country you're looking at. So it moderated. We had expected it maybe to moderate a tad more. But I think what you heard from all three of us is that we have good momentum on the OpEx side, and in particular on labor. What's driving that is there are a couple of things we've all commented on, which are driver turnover is down 250 basis points. And why is that significant? It takes a lot of the cost friction out from the labor line. And we're seeing it not only in our quality of service and our safety results, but on a labor cost per unit, we're continuing to see that trend down.

Devina Rankin, Executive Vice President and Chief Financial Officer

I'll speak to the 5% to 7% for a moment because I think what's interesting is when you look at 2023 specifically, we're guiding about $325 million of EBITDA growth at the midpoint. That includes a $125 million decline from the sustainability businesses. And so when you adjust that, that's $450 million of growth from the combination of strong execution in the solid waste business and the optimization of SG&A costs. That's over 8% EBITDA growth in our business. And so I think it indicates that, that 5% to 7% outlook does have some upside potential, and we start to see the momentum of the optimization efforts that we are putting forth. And when we see the stabilization in labor, which John just spoke about, it really helps drive that forward even more.

Tobey Sommer, Analyst

I appreciate that discussion. What kind of rate in underlying comp growth is there taking the turnover, the hiring, training kind of out of the equation?

John Morris, Executive Vice President and Chief Operating Officer

I'm not sure. Could you take one more crack at that?

Tobey Sommer, Analyst

What is your compensation growth for your existing employees? What is the underlying trend there when you remove the factors of training and hiring costs?

John Morris, Executive Vice President and Chief Operating Officer

Yes, yes. That's a good question. That 6.1% that I commented was looking at average unit rate per hour. So that is probably the best barometer for what's happening. And that's what I was mentioning last year, that was 9%, 10%, 11%, depending on what part of the world you were looking at. So on an hourly rate, that's where we see the moderation coming down. The growth of that rate has come down almost in half.

Jim Fish, President and CEO

I believe the focus on leveraging technology for certain positions has been significant. We have decided not to fill 1,500 roles in 2022 and 2023, primarily in customer experience, where technology has helped reduce call volume considerably. Overall, we anticipate needing to eliminate around 5,000 to 7,000 positions over the next few years. John is also looking to remove some operational roles by transitioning from traditional equipment to automated options. The shift from a rear loader, which requires a person to operate, to an automated side loader not only improves safety but also enhances productivity by 25% to 30%. So far, we have only removed 100 of these positions, mainly related to truck deliveries, but we have another 400 ready to be phased out as new trucks arrive. Over the next couple of years, we expect to eliminate more than 1,000 of these roles.

John Morris, Executive Vice President and Chief Operating Officer

The one thing I would add, Jim, is we skipped over recycling. I mean, if you look at the benefits we're showing in the recycling business in these automated plants and the margin expansion and the labor dependency and ratio reductions, that's a clear place where it's showing up. It takes a little longer to do with over 15,000 plus routes. But in the recycling business, Brent and Tara and team have done a nice job of really demonstrating where automation drives real dollars out of the business.

Jim Fish, President and CEO

No, I mean that's look, I think what I was trying to say is that you're starting to see some of these valuations increase. And so really my main point is that we're going to be disciplined about that. I mean, especially when you consider the investments we're making in RNG and recycling, if you apply a multiple to that, it's a multiple of three or four compared to anything in double digits, which seems unreasonable. That doesn't mean we're not going to pursue acquisitions, but I think we're going to be cautious about how we approach that, particularly regarding these higher multiples.

Tobey Sommer, Analyst

Thank you.

Operator, Operator

Our next question comes from the line of Stephanie Yee with JPMorgan. Your line is open, please go ahead.

Stephanie Yee, Analyst

Good morning. I wanted to ask about the plastic commodity prices being down. It sounds like on the OCC fiber front, that wasn't so much of a surprise. But if you can just comment on what's driven the decline in the plastic piece? And what your expectations are, not necessarily for this year, but just maybe perhaps for 2024?

Tara Hemmer, Analyst

Sure. If you look at what's happening with plastics, it really comes down to the virgin price for plastics is low, which is putting pressure on the recycled pricing. But we think long term, if you think about what's happening with brands, they all have commitments to buy recycled content, and we think that will come back. They are going to come back into the market to buy to meet their commitments. So we would expect that we would see a ramp longer term. It's one of the reasons why we're excited about some of our investments that we've made in plastics recycling and advancing those. And it's one of the things that our automated recycling plants do. They help capture more plastic, which will go to those markets longer term.

Stephanie Yee, Analyst

Okay. Great. And just a question again on kind of the longer-term EBITDA margin expansion potential, the 40 to 60 basis points, I think was mentioned and the 5% to 7% EBITDA growth, is that premised on yields being higher than that 2% level that was presented back in May of 2019, just because average yield is tracking higher than that right now? And it seems like there is momentum behind pricing, generally, both on resi and both on the collection and also the post-collection side?

Devina Rankin, Executive Vice President and Chief Financial Officer

Yes, it's a great question, Stephanie. I think the way that we're looking at that is not a specific yield number, but instead the spread between our yield and our cost inflation. And what we're really satisfied with is that we've seen flexibility in our pricing programs to be responsive to different cost environments. And so whether the yield in that initial guidance in 2019 was 2% or we're closer to the 5.5% today. What we're focused on is ensuring that we get the right spread from optimizing the business as well as continuing to price to cover cost inflation for long-term growth.

Operator, Operator

Thank you. That's all we have time for today. Thank you for participating in today's conference call. You may now disconnect.