Earnings Call Transcript - WM Q1 2021

Operator, Operator

Good afternoon. Thank you for standing by, and welcome to the Waste Management National Services First Quarter 2021 Earnings Release. 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 today’s conference is being recorded. I would now like to hand the conference over to Ed Egl, Director of Investor Relations. Sir, I give it to you.

Ed Egl, Director of Investor Relations

Thank you, Holly. Good morning, everyone, and thank you for joining us for our first quarter 2021 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 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 our filings with the SEC, including our most recent Form 10-K. John will discuss the results of 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 first quarter of 2020. 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 wm.com for reconciliations to the most comparable GAAP measures and additional information of our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day, beginning approximately 1:00 p.m. Eastern Time today until 5:00 p.m. Eastern Time on May 11th. To hear a replay of the call over the internet, access the Waste Management website at wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and as a reservation code 1299110. Time-sensitive information provided during today’s call, which is occurring on April 27, 2021 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 Waste Management is prohibited. Now, I’ll turn the call over to Waste Management’s President and CEO, Jim Fish.

Jim Fish, President and CEO

Thanks, Ed, and thank you all for joining us. It was said many times last year that 2020 was a year like no other. For many reasons, it was an incredibly difficult and trying year. Yet our positive message internally was that great companies use tough times to better themselves, and that’s precisely what WM did. The first quarter of 2021 showed that with an exclamation point. We had an exceptionally strong start to the year as we kept our focus on those fundamentals that have always been great. Our people first, then our customers, and then we focus on the details of our business. And that order inevitably produces the best results. In Q1, it sure did as we achieved record operating EBITDA of $1.16 billion and robust cash from operations of $1.12 billion. Typically, during our first quarter earnings call, we reaffirm our full year guidance. However, as we view these strong results, in addition to our confidence in the transformative changes we’re making to our business model and the fact that we have yet to see a full recovery in our critical landfill commercial and industrial volumes, it became clear that we’re on track to outperform our guidance from only two months ago. Combine this with the broader economic trends and all indicators show that our full year revenue, adjusted operating EBITDA and free cash flow are on track to meet or exceed the upper end of the guidance ranges we provided in February. Devina will discuss our updated guidance, but it’s safe to say we’re very excited about our performance for the first quarter, and we expect to show continued strength throughout the year. We’re seeing tangible benefits from the investments that we’ve made in recycling and renewable energy. In our recycling line of business, we’ve developed a model for all new plants which, with the addition of sophisticated technology, produces far better returns through a combination of added efficiencies, a higher quality of saleable material, and less residual material for disposal at the end of the process, all while our basket of recycled commodity prices have climbed back nicely to historical average price levels. Additionally, three years ago, we made the decision to close the loop between our natural gas fleet and the gas produced at our landfills by investing in the renewable energy business. We’re now seeing those investments pay healthy dividends with approximately two to three-year paybacks on our four plants, in tandem with greater stability and higher pricing in the renewable energy markets. As we discussed last quarter, WM is also well-positioned to leverage our ESG leadership and particularly our focus on environmental sustainability to help our customers meet their own climate goals through recycling and other beneficial uses such as renewable energy generation. We’re in a unique position to help key stakeholders rise to the challenge. And we can do this while growing our business at the same time, collaborating with our stakeholders to find new ways to create value together. Continuing to integrate environmental sustainability into our strategic business framework for long-term sustainable and profitable growth requires a strong focus, which is why we’ve taken a step to dedicate a member of our senior team to this effort. I’m pleased to announce that Tara Hemmer, Senior Vice President of Operations, will be taking this new role as Senior Vice President, Chief Sustainability Officer reporting directly to me effective July 1. With Tara’s move, our Area Vice President leading the Greater Mid-Atlantic area, Rafa Carrasco, will be promoted to a member of the senior leadership team as Senior Vice President of Operations. We’ve also launched a new exciting education benefit for our team members this month that will provide development and upskilling opportunities for our workforce. These changes underscore how the tenants of ESG are embedded into our broader business strategy. As digital transformation sweeps across nearly every industry in the way of the pandemic, we’re making strides in differentiating our customers’ experience through end-to-end digital transformation. Today, our customers can manage their relationship with us through our online My WM platform, which is connected operationally through our Smart Truck technology and supported by our customer analytics and data management tools. Our newly automated setup process streamlines customer orders and accelerates the speed at which we can deliver on our commitments while also reducing our cost to serve. These developments, combined with continued growth of our e-commerce channel, give us confidence that our decision to accelerate technology investments was the right one, and we will emerge from the pandemic a stronger, more agile company. In closing, I want to thank the entire Waste Management team for their hard work and dedication that has positioned us for a record-setting 2021. WM is well-positioned to benefit from the continued reopening as more states and provinces emerge from the pandemic, and we expect our commercial, industrial, and landfill businesses, our three most-lining businesses, to benefit from further volume recovery and produce robust financial results with high incremental margins over the remainder of the year. I’ll now turn the call over to John to discuss our operational results for the quarter.

John Morris, Executive Vice President and COO

Thank you, Jim, and good morning. Before we discuss the excellent operating results from the first quarter, I want to provide an update on the integration of ADS. Over the past six months, we've made significant strides in merging the two businesses and have accelerated some of our integration plans. The teams have dedicated themselves to ensuring a smooth transition. Due to the success of the integration thus far, we are raising our synergy expectations to a total annual run rate of $150 million, with $130 million expected from operating costs and SG&A savings, and $20 million from capital savings. For 2021, we now anticipate synergies between $75 million and $85 million, all from cost savings. With around $15 million in annualized synergies realized in 2020, we expect to conclude 2021 at an annual run rate synergy level of approximately $100 million. The remaining $50 million is anticipated to be captured in 2022 and 2023 across operating costs, SG&A, and capital expenditures. Now, turning to our first quarter results, organic revenue increased by 2.1%, as disciplined pricing and improved recycling results compensated for modest volume declines. Our pricing performance was strong, with a core price increase of 3.4% and a collection and disposal yield of 2.8%, surpassing our expectations. Notably, our commercial yield improved sequentially from 1.9% in the fourth quarter to 3.1%. As economies reopened during the first quarter, collection and disposal volumes improved, showing a smaller decline of 2.3% compared to 2.7% in the previous quarter. In the first quarter, we saw a positive turn in net new business, churn significantly improved to 8.2%, and service increases expanded. Although volumes have notably recovered since the second quarter of 2020, we are still comparing to a significant decline of 10.9% in collection and disposal from that period. As Jim highlighted, WM stands to benefit from further enhancements in North American economies. By the end of the first quarter, we recovered about 72% of the commercial yards lost due to COVID, leaving ample opportunity for further growth in commercial volumes as we progress through the year. Similarly, our other high-margin businesses—industrial and landfill—also have potential for volume growth as visibility into economic recovery continues to improve, with more event work being scheduled and completed. Across our lines of business, we’re making advancements with a strong focus on pricing. I’m pleased to announce that we achieved impressive results in residential landfill and recycling during the quarter. Residential yield doubled year-over-year to 4.2%, reflecting our efforts to boost profitability in this area. This is the highest residential yield we have realized since 2008, highlighting our success in demonstrating the value of our service and appropriately pricing it. The increased yield drove operating EBITDA margins in the residential segment to the highest level in the past year, despite ongoing elevated residential container rates. Landfill core pricing stood at 3.2%, a solid result considering the impact of lower volumes due to both the pandemic and severe winter weather. In recycling, operating EBITDA doubled year-over-year, resulting in earnings that rank among our top five best quarters ever. These results are genuinely indicative of our work to enhance the business model while providing a sustainable solution for our customers, not merely a reflection of rising recycled commodity prices. While previous top recycling quarters averaged a commodity price of $127 per ton, we achieved our strong first quarter results with a price of $79 per ton. Lastly, regarding costs, first-quarter operating expenses as a percentage of revenue decreased by 130 basis points to 61.1%, illustrating our commitment to cost discipline as volumes recover. We saw a 40 basis point improvement in our labor costs as we managed overtime spending. Additionally, we identified and captured efficiency improvements in both the commercial and industrial segments, aided by our investments in technology that enhance our agility. In closing, I want to express my gratitude to the Waste Management team for their outstanding efforts in managing our operations to set us up for success in 2021. I will now turn the call over to Devina to delve into our financial results in more detail.

Devina Rankin, Executive Vice President and CFO

Thanks, John, and good morning, everyone. As you’ve heard from both Jim and John, we had a fantastic start to 2021 and we forecast continued strength in our business as local economies emerge from the pandemic. These strong results and our confidence in our outlook for the remainder of the year have led us to raise our full year financial guidance. Revenue growth is expected to be 12.5% to 13% with combined internal revenue growth from yield and volume in the collection and disposal business of 4.5% or greater. The increased outlook is underpinned by our disciplined pricing programs and strong outlook for continued volume recovery. For adjusted operating EBITDA, we now expect to generate between $4.875 billion and $4.975 billion, a $100 million increase at the midpoint from our prior guidance. The improved outlook for adjusted operating EBITDA translates directly into incremental free cash flow. And we now expect that we will generate between $2.325 billion and $2.425 billion of free cash flow for the year. Our team members on the front line continue to deliver, and the investments we are making in our people, technology and customer experience are generating strong results. Turning to our first quarter results. Net cash provided by operating activities grew $355 million. The contribution from operating EBITDA growth accounted for a little less than half of that increase, with the remainder coming from lower incentive compensation payments and increasing cash collections from customers, and favorable timing of some of our payables. While we expect some of the timing differences experienced in the first quarter to reverse for the year, the remaining contributors to our strong cash flow from operations results position us for a very strong year. In the first quarter, capital spending was $270 million, a $189 million decrease from the first quarter of 2020. Capital expenditures were lower in the quarter, primarily due to timing, along with the timing of fleet purchases, which we had intentionally front-loaded in 2020 and steps we took in late 2020 to accelerate some of our 2021 capital, given our confidence in the pace of volume recovery. We continue to prioritize the investments in the long-term growth of our business, including recycling, renewable energy, and technology investments that we have previously discussed. For the full year, we expect capital spending to be at the high end of our $1.78 billion to $1.88 billion guidance range as we invest in our business to support growth, reduce our cost to serve, and extend our environmental sustainability efforts. Putting it all together, our business generated free cash flow of $865 million in the first quarter. The operating EBITDA growth, lower capital expenditures, and favorable working capital changes that I discussed drove the significant year-over-year free cash flow increase. This sets us up very well to achieve our increased free cash flow outlook. In the first quarter, we used our free cash flow to pay $247 million in dividends and allocated $250 million to share repurchases. Turning to SG&A costs. SG&A was 10.7% of revenue in the first quarter. That’s a 20 basis point increase over 2020. We remain focused on managing our discretionary costs, optimizing our structure for the ADS acquisition, and using SG&A dollars to enhance our business. Our deliberate increased level of investment in technology as well as higher incentive compensation accruals are the driver of SG&A as a percentage of revenue being above our long-term target of less than 10% of revenue. Though we are committed to ensuring we return to that optimized cost structure in the near term. Our first quarter leverage ratio of 3.04 times has improved from the fourth quarter due to our strong operating EBITDA growth. This leverage ratio remains well within the financial covenant of our revolving credit facility and right at the top of our long-term targeted range of 2.5 to 3 times. Our strong first quarter results and increased expectations for current year operating EBITDA and free cash flow position us to purchase at least $1 billion of our shares in 2021, and at the same time, achieve our target leverage of 2.75 times by the end of the year. Our capital allocation priorities continue to be a strong balance sheet, prudent investment in the growth of our business, and strong and consistent shareholder returns. With the strength of our collection and disposal business, expectations for continued recovery, and improved market backdrop for recycling, effective cost control and even better-than-expected integration synergies from the ADS acquisition, cash flow conversion is strong. And as a result, we expect to increase cash allocated to shareholder returns from our initial plans. In closing, it is imperative that we thank the men and women across the Waste Management team for their tireless efforts to serve our customers and communities each day. Our strong results are a testament to their commitment, and we’re excited about what we will achieve together over the remainder of the year. With that, Holly, let’s open the line for questions.

Operator, Operator

Our first question is from Jerry Revich at Goldman Sachs.

Jerry Revich, Analyst

Yes, good morning, everyone. Great performance right from the start. I’d like to know what level of volume growth your business can handle before you start adding more employees as you look at your current workforce and anticipate recovery.

Operator, Operator

Our first question will come from Jerry Revich with Goldman Sachs.

Jerry Revich, Analyst

I’m wondering if you can talk about what’s the magnitude of volume growth that your footprint can absorb off of the current run rate levels before we’re back at having to add headcount. You spoke about reducing overtime in the quarter. And as we shift forward to recovery from here, I’m wondering if you could touch on how we should think about absorption from here in capacity. Thanks.

Jim Fish, President and CEO

Yes, Jerry. What I would tell you is if you looked at our performance throughout the kind of COVID, the volume slide, if you will, efficiencies improved throughout, obviously, as I mentioned, our management of overtime certainly improved. And what that also did is helped us build some capacity in the system. So, as we look at the rest of 2020, what we’ve revised guidance to, we feel like we’re in good shape to absorb that volume.

John Morris, Executive Vice President and COO

I want to add that we're also considering the return of labor. Currently, all U.S. companies are facing temporary competition from the government due to unemployment benefits, which affects us. The positive aspect for us is that we did not lay off employees during COVID. Companies that did face challenges in rehiring. As you may remember, we guaranteed 40 hours last year when the pandemic began, ensuring job security for our employees. This decision benefited us. We didn't foresee the lengthy duration of unemployment benefits, but it certainly helped us. Additionally, we acknowledge that labor inflation is persistent, with a roughly 5% increase for our nonexempt employees over the past couple of years. However, the government as a new competitor was unexpected, and we believe this situation is temporary. Unemployment benefits are currently set to conclude at the end of July, though there might be extensions through September with new packages. We'll manage volume using pricing strategies from a macroeconomic perspective, ensuring we take on only the best new volume. John's team will also monitor the labor line, adjusting pricing as necessary to manage volume intake.

Jerry Revich, Analyst

Okay, terrific. I appreciate the color. And then, as we think about where volumes are tracking for the first quarter, they’re about 3% below 2019 level. So, if that same trajectory holds in the second quarter, we should be looking at something like high-single-digit volume growth. Is that consistent with what you’re seeing through April? Can you just comment on whether that two-year stack holds and if that’s what we should be thinking about the cadence in the second quarter?

Jim Fish, President and CEO

Yes. Jerry, I think you make a great point. We’ve looked at 2019, we’ve looked at 2020, and really, what we’ve done is looked at Q4 of 2020 to look at some of the sequential trends on volume. And that’s really where I think we see a level of confidence. January and February were certainly challenging months, partly due to weather, partly due to just the comp year-over-year. Really happy with what we saw in March on the volume front and equally pleased with what we’re seeing in April. So, while we’ve looked at 2020, 2019, we’ve really focused on what the sequential improvement has been, and that’s part of why you heard the message from us about how we feel about the balance of the year.

Jerry Revich, Analyst

Terrific. And lastly, on the ESG side, obviously, some clarity for wind pricing now. Can you talk about to what extent you have the capability based on permitting to transition additional landfills to landfill gas producing landfills that tie to the grid to take advantage of where wind prices are and what the cadence of the additions could look like over the next couple of years?

Jim Fish, President and CEO

Yes, as I mentioned, we have four plants and a fifth that will be operational in 2022. The capital for this is currently being invested as part of our plan, which Devina referenced. We see this as a significant opportunity for us, largely because nearly 70% of our routed fleet is CNG, even with the lower percentage of ADS trucks factored in. This transition from diesel to natural gas is definitely beneficial for us. Additionally, we appreciate being able to connect our natural gas trucks with the gas produced at our landfills. We began investing in this two to three years ago, and at current pricing, the returns are quite strong. I anticipate that we will maintain this investment level this year and carry it forward into next year.

Operator, Operator

Our next question will come from the line of Jeff Goldstein from Morgan Stanley.

Jeff Goldstein, Analyst

On the new internal revenue growth guidance of 4.5% or greater, can you just help parse out what the breakdown of this figure is between yield and volume? How that compares at all to your prior thinking around the recovery in terms of that mix?

Devina Rankin, Executive Vice President and CFO

Yes. So, what we’re looking at is what you saw in the first really strong performance on the yield side translating into strength for the remainder of the year, and that really being the catalyst for the upside on the total of 4.5% or greater. That being said, our initial outlook for volume was around 1.5% to 2%, and we’re optimistic that we’ll also be at the high end of that range. But outperformance to previous expectations at this point really is centered around strength in pricing and the outlook for continued strength over the rest of the year.

Jeff Goldstein, Analyst

Okay, perfect. And just on the EBITDA margin guide for the year, if my math is right, the implied margin for the year is coming up a similar amount as the increase in the expected synergies from ADS. So, is that fair? And should we assume that based on that your other investment assumptions for the year are largely intact, or just any other cadence of expenses we should be contemplating for the year?

Jim Fish, President and CEO

Yes. When we look at 2021 on a year-over-year basis, we knew we had some cost headwinds. And in particular, the second quarter had some cost headwinds for health and welfare specifically. We also expected incentive compensation to be a headwind for the full year, though that’s an even greater headwind now because of our strong outlook for 2021 than we would have initially expected. Our overall margin guidance for 2021 initially was as much as a 50 basis point improvement. You can see with the strong performance in the first quarter. We expect there could be some upside to that, though rather than update margins specifically at this point, we’d really like to see the seasonal results on volume because the contribution margin from that incremental volume is one of the important things for us to keep our eye on. That being said, I think it’s really important to step back and recognize that we started with guidance that could have been slightly backward at 20 basis points on a year-over-year comparison, both because of those comp headwinds and the integration of ADS. But then, when we look at where we stand today, we’re confident that we’ll actually be at the high end of our expectations of 50 basis points. And that’s certainly somewhat because of the ADS synergy capture, but it’s also because of some stronger outlook on pricing that I mentioned earlier.

Operator, Operator

Our next question will come from the line of Hamzah Mazari with Jefferies.

Mario Cortellacci, Analyst

Maybe you could talk about how much room you have on the disposal pricing side. I think, it’s running in the high-2 range right now as volumes are recovering. Maybe you can speak about it just in context of what you guys were executing on and what the goal was prior to COVID-19 and how pricing on the disposal side had started ramping prior to the pandemic.

Jim Fish, President and CEO

Landfill pricing is always a top priority for us. The MSW core price was strong for the quarter, along with other lines of business. It’s important to note that several of these businesses, particularly commercial and recycling, have shifted to being more fee-based. As volume increases, the fees also rise, contributing to the overall price. This is one of the reasons we decided to raise guidance in Q1. The strength in pricing is notable, and while volumes have not fully recovered, particularly in the high-margin areas of commercial, landfill, and industrial, we are beginning to see positive trends starting in March and continuing into April. Additionally, we feel confident in our guidance changes because our recycling efforts are yielding strong results at average commodity prices. This quarter, we averaged $79 for our basket of commodities, which is in line with our historical averages, whereas in the previous four quarters, we reached as high as $125 or $127. All these factors contribute to our confidence in raising guidance, with pricing, especially landfill pricing, being a key strength this quarter and expected to remain strong in the upcoming quarters.

Mario Cortellacci, Analyst

And then, on ADS synergies, just thinking about what the long-term revenue synergy potential is there. I mean, prior to the deal, they were busy doing deals in building out their route density and that more or less put on hold as the deal was going through. And then, again, we got hit by the pandemic. Does that create more pricing opportunity for that particular business on top of what I guess was already baked into what their plans were? Any thoughts on that would be great.

Jim Fish, President and CEO

Yes. I believe ADS will follow a pricing model similar to that of WM legacy. Our primary focus regarding synergies has been on cost synergies. Like WM legacy, we are analyzing the cost aspects of ADS to determine what adjustments we need to make with pricing in order to keep pace with inflation.

Mario Cortellacci, Analyst

Got it. And then, if I could sneak in just one more. You had mentioned weather, and I don’t know if I missed it during the prepared remarks. Are you able to help quantify what the weather impact was on volumes in the quarter?

Devina Rankin, Executive Vice President and CFO

It's challenging to pinpoint exact volumes. However, we examined our volume trends month by month. We observed a notable decline in February, with some recovery in March. We can't determine how much of this was genuine recovery of the volume lost in February versus ongoing momentum from economic recovery post-pandemic. We believe it's primarily the latter and are optimistic about continued growth based on our observations in April so far.

Jim Fish, President and CEO

I think it’s fair to say that it was not insignificant. I mean, when we have to shut down the entire state of Texas for a week and shut down our Gulf Coast operations, which are very important operations for us from a special waste standpoint, for example. We shut down a lot of our operations in areas like Tennessee, I mean that was shut down for almost an entire week. So, it was not an insignificant impact. It’s part of why the volume story is a little clouded for the first quarter, and then why John gave some details on what January and February look like versus March and April.

Operator, Operator

Our next question will come from the line of Walter Spracklin, RBC Capital Markets.

Walter Spracklin, Analyst

I’d like to begin by acknowledging that you had an excellent quarter in terms of cash flow generation, indicating that this trend is continuing. I am curious about how this impacts your approach to mergers and acquisitions. Does having more financial resources encourage you to seek out more M&A opportunities? Your experience with ADS seems to be progressing well, or are you primarily focused on the integration process and not considering M&A beyond small additions?

Jim Fish, President and CEO

Yes, it's likely more about the latter. We are still very focused on ADS integration. However, internally, we're hearing that there is considerable interest, likely influenced by potential tax law changes. I believe this is starting to build up the pipeline a bit. At this moment, we're affirming the lower end of our historical range of $100 million to $200 million, which we communicated back in February, and we are maintaining that stance. There's always the possibility that an attractive opportunity arises, and it may be that valuations decrease slightly as some sellers consider the impact of higher capital gains rates on their selling prices. While I can't say for certain that will happen, I wouldn't be surprised if it does. For now, Walter, our primary focus remains on ADS integration, and we’re sticking with the bottom end of that $100 million range.

Walter Spracklin, Analyst

That makes sense. Okay. And my second question here is on coming back to your contracts and how might the pandemic have given you an opportunity to get better yield without raising your core price. And here, I’m referencing to structurally charging more or charging on a weight basis as opposed to a per household. But, is there anything that you’re looking at now that is allowing you to make a greater return on your contracts with your customers, commercial, residential or otherwise, that goes beyond just simply higher price?

Jim Fish, President and CEO

There are a couple of dynamics affecting price. If we focus on commercial, industrial, and residential sectors, we are transitioning part of our commercial operations to a fee-based model, which is an important aspect of pricing and we believe it will continue to benefit both commercial and industrial segments. Regarding residential, we have seen strong performance lately. John and his team have achieved the highest yield since 2008, reaching a 4% yield, which is a notable success for the Company. This achievement is largely due to contract renegotiations rather than increases in some indexes. Interestingly, we experienced a slight decline in those indexes this quarter. We anticipate that inflation will rise slightly, which typically benefits us, though it didn't impact us in Q1. The improvements we saw were primarily from renegotiation of contracts, considering the expectation that weights will remain higher due to the pandemic and a permanent shift towards remote work. Additionally, we are transitioning to a different index that better reflects our cost structure, shifting from a CPI index to a water, sewer, and trash index. Currently, about 40% of our overall business is index-driven, with approximately 40% of that using the new index, amounting to around 15% or 16% of our total.

Operator, Operator

And our next question will come from the line of Tyler Brown with Raymond James.

Tyler Brown, Analyst

Hey Jim. So, back at our conference, you talked about some pretty stark differences in the small container volumes in reopened versus not reopened markets. And I realize you may not have all the data right there at your fingertips. But, can you just give us some flavor of how, say, like a Texas or Florida small container track versus, call it, Ontario, Canada? Just maybe something like that. I’m just curious to get a little more color there.

Jim Fish, President and CEO

Right. So, Tyler, you're correct. We discussed some states that reopened early, such as Texas, Florida, Arizona, and Tennessee, which showed strong signs of recovery, while other states lagged behind. The good news is that some of the states in the latter category are now starting to reopen. California serves as a prime example, along with New England and parts of the Upper Midwest, including Illinois. Currently, the area that still shows the most weakness and hasn't yet joined the reopening trend is Canada, particularly Eastern Canada. I checked the numbers this morning, and they still reflect weakness due to extended shutdowns. We're also observing some softness in New York and Michigan. However, the number of areas in that softer category is decreasing, which is promising. Additionally, I would include a couple more states that are performing well alongside Texas and Florida; we have a few new entries that are contributing positively.

Tyler Brown, Analyst

Okay. That’s helpful. But those, Texas and Florida, are they tracking up in small container?

Jim Fish, President and CEO

Yes. I reviewed Florida’s numbers yesterday, and they look very positive. The main challenge we face is related to labor, particularly competing against those who are not currently working. While we didn’t have to lay anyone off due to COVID, our business growth requires us to hire more drivers and technicians. We have several open positions that are not easy to fill. However, we believe this situation is temporary. We don’t expect to be competing against government support forever. We anticipate that by the third quarter, there will be a realization that the additional unemployment benefits need to end, as there are plenty of jobs available. Overall, Florida is performing really well right now, with a significant recovery in the hospitality sector. The same can be said for Arizona and Texas as well.

Devina Rankin, Executive Vice President and CFO

If I take the midpoint of the EBITDA guidance, it seems the increase was about $100 million. I'm interested in how that is broken down. It appears there are about 20 million in additional ADS synergies, but there seems to be a slight drag from incentive compensation. So, out of the remaining amount, how much is due to commodity changes, and how much is related to improvements in IRG? Yes. So, the first priority is investing in the long-term growth of the business, and that’s something that we talk a great deal about. Organic growth through focuses in recycling and renewable energy have been places that we’ve said. You could see some outpaced capital spending from us. The current guide for 2021 incorporates our expectations for the full year in those programs. We just have yet to determine how much we could accelerate spend in 2022 and 2023 to cover incremental investment that could be worthwhile in those spaces. I think, the rest of the allocation really comes down to shareholder returns, continuing to grow the dividend over the long term in that 45% to 50% range on a payout ratio basis, and we measure that on free cash flow. So, there’s direct conversion from that free cash flow measure and the long-term incentive plan to award the dividend, which I think is a really strong indicator of how we think about the growth that can happen as we revisit that in the fourth quarter. Beyond that, the statement that we made about at least $1 billion of share buyback in 2021 is an indication that when we don’t see M&A being the place that we will spend that available dollar free cash flow, there is tremendous flexibility to allocate incremental dollars to the shareholders through share buyback.

Operator, Operator

Our next question will come from the line of Kevin Chiang with CIBC.

Kevin Chiang, Analyst

Hi. Good morning. Thanks for taking my questions here. And congrats on a strong start to the year. I’m just wondering, as the economy opens, I think, during the pandemic, just given all the government support for small businesses, I think that did cloud some of the analysis in terms of what bad debt could look like as companies came out of this. And I guess, parts of your business have come almost full circle, I guess, and some of this government support is being removed. Is anything playing out that was unexpected in terms of how you accrued for some of these bad debts, or are things coming better or worse or maybe as expected?

Devina Rankin, Executive Vice President and CFO

I would say that things are recovering as expected. From a cash flow perspective, the really strong result that we had in the current year has to do with the headwind that we experienced in the first quarter of 2020. In the first quarter of 2020, we were between $60 million and $80 million behind on cash flow because we saw our customers slow down their payments. We’ve seen really strong resilience from our customers, and I think our proactive steps to protect our customers, particularly small business through the pandemic has paid dividends in that regard. And so, I will say, we had really good results from a days sales outstanding and bad debt perspective in the first quarter, a little ahead of expectations, but all-in-all, I would say more close to tracking than leading.

Kevin Chiang, Analyst

Okay. That’s great news there. And then, maybe just on the opportunities around the landfill gas capture. I know you spoke to this in your prepared remarks. But, it does feel like there’s more private capital flowing to this opportunity, like, I’ve seen, for example, a number of investment announcements around companies looking to partner with landfills on things like sustainable aviation fuel. Are you seeing the cost of capital come down on these kinds of projects, or maybe conversely, is the ROIC improving? Just as a lot of other end markets look to reduce their own carbon intensity and look to landfill gas captures, maybe helping them achieve their own goals?

John Morris, Executive Vice President and COO

Yes, Kevin, in terms of third-party investments, there are definitely funds available looking for opportunities in this sector. However, it’s crucial to note that the four or five plants we currently operate or have invested in are demonstrating strong performance, and we will continue to seek out similar opportunities. As Devina mentioned, how we finance these ventures is a separate issue, but we have a solid balance sheet to support this. We have a fleet of around 130 plants, with a few being RNG facilities. As Jim pointed out, we are utilizing renewable natural gas to fuel more than half of our fleet, which we believe is a sustainable long-term solution. We still have significant capacity to enhance our fleet's fueling capabilities. We are confident in our position within this market and the investments we are making.

Operator, Operator

And our next question will come from the line of Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

John, just looking at the $50 million of upsized ADS synergies targeted here, can you give us maybe the two or three big factors that are really driving that? Where are you getting greater savings than previously targeted? And then, I think this will help investors understand, what substantively you’re actually doing here to improve the returns?

John Morris, Executive Vice President and COO

You’ve heard us discuss in previous quarters that the integration has begun and is progressing well. Many elements of the integration risks are turning out better than we anticipated. We mentioned that data migration was the last significant challenge, and that is improving as we transfer information to our system. This is crucial because to achieve routing synergies from consolidations, we need all information in one database. Regarding your question about the public deal, we don’t have the same level of insight as with a private deal. Upon examining the details, we discovered that the impacted areas can operate the business more efficiently than we initially thought. Additionally, when looking at internalization and transportation synergies, we found further opportunities for savings. On the supply chain front, despite some challenges with certain commodities, our supply chain team, after reviewing the entire portfolio of spending, has also identified additional benefits. Overall, the efficiency improvements in the business relate to internalization, transportation, and disposal, along with corporate synergies in the supply chain. These are the three main areas driving our progress.

Noah Kaye, Analyst

Okay. That’s super helpful, John. And then, I guess, a question for Jim and the team broadly. I’m just curious to know how you’re engaging so far with the new administration on some of the priorities they focused on in terms of climate pledges, they’re clearly taking a whole of government approach that includes EPA. Also, it’s clear that waste reduction is for some parts of the government focus as well. So, just can you talk about some of the engagement that you’ve had so far in some of the focus areas for you as we kind of get in kind of almost what, one quarter, all the way through the year of this first administration?

Jim Fish, President and CEO

We have been engaged with the EPA for a considerable time, not just since the new administration took office. This engagement has prepared us for upcoming changes from the EPA, which we believe could benefit us due to our commitment to high environmental standards. If the new administration raises expectations, we see that as advantageous for our operations. Devina has also mentioned potential tax changes, which we’re monitoring. Personally, I haven’t had direct engagement with the current or the previous administration; they may not consider our perspective important, but we’re content to operate under the radar.

Operator, Operator

And our next question will come from the line of Jeff Silber with BMO Capital Markets.

Jeff Silber, Analyst

Thanks so much. I know it’s late. I’ll just ask one, actually a follow-up from the last one. The President has proposed a pretty aggressive infrastructure program. I know there’s some people thinking that may not all the spending be infrastructure-related. But, I’m just curious from what you’ve seen so far, do you think there’ll be any benefits to your Company from if any things come to fruition?

Jim Fish, President and CEO

Look, I think, an infrastructure bill is going to be a positive for us, anyway you slice it. But there is a question about what the details of that bill are. I don’t think anybody knows at this point. And there still is a lot of Nash compete that’s going to need to take place within Congress to figure out those details. So, there could be an infrastructure bill that ends up being even better for us, depending on the details of it. But any infrastructure bill is, I think, good for the economy and ultimately good for us.

Jeff Silber, Analyst

Can you give some examples of what those details might be that could benefit you?

Jim Fish, President and CEO

An infrastructure bill that targets road construction, bridges, or large projects would definitely benefit us. However, an infrastructure initiative aimed at reducing natural disasters offers a much longer-term advantage. I’m uncertain if infrastructure spending that leads to fewer hurricanes will directly benefit us, as the effects will be less obvious. That said, an infrastructure bill related to airports, roads, and bridges will certainly allow us to gain advantages both in terms of revenue collection and waste disposal.

Operator, Operator

And our next question will come from the line of David Manthey with Baird.

David Manthey, Analyst

One last cut here at the guidance walk, if I could. So, you’re saying the EBITDA guidance is up by about $100 million, and I believe you’re saying the compensation expense will offset pretty much the ADS synergies. So, if we just set those things on the side. If your revenue midpoint is up by 266, EBITDA is up by 100, that looks like a high-30s kind of contribution margin. And what I’m asking here is, it seems like if you’re saying most of the revenue upside is coming from yield and commodities and growth in higher-margin segments. Are you introducing a factor of conservatism here, or is there another element we’re missing?

Devina Rankin, Executive Vice President and CFO

What I mentioned earlier about the cost headwinds that we know are coming, they were particularly strong in the second quarter 2021 outlook. And so, our expectations currently are certainly that we could outperform on the margin side relative to where we stand today. But, to build it in before we’ve seen the volume acceleration we thought would be not necessarily prudent based on where we stand. And we knew that $100 million lift in EBITDA from just two months ago was a really strong indication of the strength of the overall business. So, is there upside, potentially that it would have to come from how we see the cost side of the equation flow through as we see volume returns.

Jim Fish, President and CEO

But I think we're always going to see this company, this management team, and even the industry as somewhat conservative. We're quite a conservative company and industry. So regarding your question about conservatism, I would say you’ll always see us being fairly conservative, which is why, as Devina mentioned, it was such a unique event for us to raise guidance after just one quarter. In my nearly 20 years with the company, I can't recall a first quarter, even a strong one, where we haven't just reaffirmed guidance. I think we had one quarter where we lowered guidance after one quarter, but it’s quite unique for us to raise it. That said, we remain thoughtful about our decisions, and a level of conservatism underpins everything we do.

Operator, Operator

And our last question today is going to come from the line of Michael Feniger with Bank of America Merrill Lynch.

Michael Feniger, Analyst

Thank you for fitting me in today. I’ll keep it brief. The industry seems to be exhibiting more discipline, particularly regarding pricing. We've noticed a positive trend in churn rates. Jim, as you observe the situation developing and volumes increasing, it appears that the reopening might be delayed based on comments from April and May. When the reopening does happen, do you anticipate that smaller players, who have been struggling, will attempt to capture that volume? Will you need to step back from certain areas that might become overly competitive in pursuit of volume, focusing instead on higher-margin opportunities? I'm interested in your thoughts on how this will unfold as the reopening gains momentum. Thank you.

Jim Fish, President and CEO

Yes, Michael, maybe a little bit. Honestly, if you look at the improvements we've made in the residential line of business, we have walked away from some contracts there. I think you'll see some of that. We will always carefully consider volume because not all volume is created equal. As we approach this reopening, there may be some volume that we simply choose not to pursue. This approach might benefit us in terms of margin and operating performance, and it could also assist our operations teams in managing the hiring needed to support that volume.

Michael Feniger, Analyst

And Devina, just to clarify, I might have missed this. Obviously, April and May are the comparisons for year-over-year based on what happened last year. How should we view the 2% volume figure for the second half and Q2? Have you provided any ranges for considering that easier comparison in the second quarter and how it might unfold in the latter half?

Devina Rankin, Executive Vice President and CFO

Yes. It’s a great question, Michael. Those estimates are really difficult to predict. But, I would tell you, our math at this point tells us that it’s around 6% volume in Q2 and then closer to the 1.5% to 2% in the back half of the year.

Operator, Operator

Thank you. That will conclude the Q&A session of today’s call. I’d now like to turn the call over to President and CEO, Jim Fish.

Jim Fish, President and CEO

Thanks, Holly. Just a quick ending comment, I just want to reiterate how much we appreciate. We now have almost 51,000 folks here that have made a huge contribution to the success of this quarter and continue to do so day in and day out. So, thanks to all of you for your contribution. And thanks to everyone on the call for joining us today.

Operator, Operator

Thank you for participating in today’s Waste Management Conference Call. This call will be available for replay beginning at 2 pm Eastern today through midnight on May 11, 2021. The conference ID number for the replay is 1299110. Again, the conference ID for the replay is 1299110. The number to dial for the replay is 855-859-2056 or 404-537-3406. Thank you. You may now disconnect.