Earnings Call Transcript - WM Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the WM Third Quarter Earnings Conference Call. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Ed Egl, Vice President of Investor Relations. Please go ahead.

Edward Egl, Vice President of Investor Relations

Thank you, Olivia. Good morning, everyone, and thank you for joining us for our third quarter 2025 earnings conference call. With me this morning are Jim Fish, Chief Executive Officer; John Morris, 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 our high-level financials and provide a strategic update. John will cover an operating overview, and Devina will cover the details of the financials. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. The Form 8-K, the press release and the schedules of the press release include important information. During the call, you will hear forward-looking statements, which are based on current expectations, projections, or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today's press release and in our filings with the SEC, including our most recent Form 10-K and Form 10-Qs. John will discuss our results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John, and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization. References to the WM legacy business are total WM results, excluding the WM Healthcare Solutions segment. Any comparisons, unless otherwise stated, will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, operating expense and margin, and SG&A expense and margin have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 p.m. Eastern Time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on October 28, 2025, 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 CEO, Jim Fish.

James Fish, CEO

Okay. Thanks, Ed, and thank you all for joining us. Our team delivered another strong quarter of operational and financial performance. This led to third quarter operating EBITDA growth of more than 15% and free cash flow growth of nearly 33%. These strong results reflect the hard work of our teams, the resilience of our business model and the value of the intentional investments we've made across our business. Our collection and disposal business continues to be the engine behind our growth, contributing more than half of the year-over-year increase in operating EBITDA. The business drove strong organic revenue growth, and we're particularly pleased with our ability to attract robust disposal volumes to our network. MSW grew 5% in the quarter and special waste volumes grew 5.5%, driven by new event work. We also remain focused on maximizing customer lifetime value through our pricing strategies and leveraging technology to optimize our cost structure, and we continue to pursue tuck-in acquisition opportunities to extend our network and drive further internalization. Turning to WM Healthcare Solutions. The strategic value of the medical waste platform within WM's portfolio is more evident than ever. We've successfully integrated the people and operations of health care solutions into the existing management and operating structure of our 16 areas. This not only streamlines our operating model, but also allows us to apply our playbook, the WM Way across the acquired business, fostering a culture of customer focus, continuous improvement, and accountability. This aligned structure accelerates collaboration and unlocks new opportunities for growth. As an example, one of our top hospital customers has increased their annual spend with us by over $5 million after choosing us as their single provider solution across their multistate network. This is precisely the type of cross-selling opportunity that gives us confidence in the long-term value of our combined offering. In our sustainability businesses, our solid performance is the direct result of success in managing contract structures and leveraging innovative technologies. Even as recycled commodity prices declined nearly 35% compared to last year, our recycling segment operating EBITDA grew by 18%, which is a phenomenal result. Our new renewable natural gas facilities drove higher year-over-year contributions from the Renewable Energy segment. Though growth was lower sequentially due to the timing of RIN sales, our full year growth expectations remain consistent with our initial outlook. I'm proud of the momentum we're building in this final stretch of '25 and even more excited about the opportunities ahead. These last several years, including this one, have been years of deliberate and disciplined investment in technology and automation in our fleet in new recycling and renewable energy, renewable natural gas facilities, and in a premier medical waste platform. Each of these investments was made with intention and with a long-term view, positioning us to serve our customers better while structurally lowering our cost to serve. We're pleased to share that 2026 is setting up to be a year of harvesting the benefits of our investments, which will be partially evident in our free cash flow as our early view for next year suggests free cash flow approaching $3.8 billion. We remain thoughtful and disciplined in our capital allocation, and we fully expect to translate this performance into commensurate returns for our shareholders. In closing, WM is exceptionally well positioned for future success. Our long-term strategy is delivering and the investments we've made are paying off. As always, our results are a testament to the hard work and dedication of our people, and I sincerely appreciate the contributions of each and every team member. I'll now turn the call over to John to discuss our operational results.

John Morris, President and COO

Thanks, Jim, and good morning, everyone. In the third quarter, our team expanded margins by maintaining discipline on price-cost spread, leveraging advanced fleet and maintenance technology to reduce operating costs and realizing returns from our sustainability investments and strategic acquisitions. Our results affirm that our strategy is working and our disciplined organic and inorganic investments deliver long-term value. In the third quarter, we saw continued growth in our core collection and disposal business, increased contributions from our sustainability businesses, and sequential margin growth and synergy capture from our Healthcare Solutions segment. In our collection and disposal business, we delivered strong performance in the third quarter with operating EBITDA margins expanding 100 basis points to a record 38.4% and operating EBITDA growing more than 7% with every line of business contributing to that growth. Both results are consistent with our operating EBITDA growth and margin expansion objectives and reflect the strength of our post-collection assets, increased landfill volumes, and our disciplined focus on optimizing price-cost spread through customer lifetime value. We're also realizing the returns on strategic investments we've made to enhance efficiency and structurally drive costs lower. Looking at our top line, we delivered solid organic revenue growth in Q3, driven by disciplined pricing and improving volume trends in several lines of business. Core price was 6%, exceeding our plan with residential and disposal pricing leading the way. Collection and disposal yield came in at 3.8%, which was in line with expectations. Volume increased in the quarter with industrial up 1.2%, our first positive quarter since 2022. We remain focused on differentiating our services and maximizing customer lifetime value, and our customers see the value of our service as churn remained right in the 9% range and service increases outpace service decreases. Additionally, landfill volumes rose 5.2% with broad strength across MSW, special waste, and construction and demolition, mostly all unrelated to wildfire cleanup. As we mentioned at Investor Day, our strategic post-collection network continues to drive value both now and over the long term as we have seen both strong price and volume contributions. And our results keep us on track to meet our organic growth expectations for the full year. Turning to operating expenses, Q3 marked our second consecutive quarter with operating expenses below 60% of revenue. This improvement was driven primarily by our collection and disposal business, which contributed 90 basis points of margin expansion through lower maintenance and risk management costs. On the fleet side, investments in trucks and technology improved our maintenance processes, reducing repair and maintenance costs by 60 basis points. Additionally, our focus on retention and training and development contributed to a 7% year-to-date improvement in the total recordable incident rate, lowering our risk management costs as a percentage of revenue. The strategic investments we've made in our team, our fleet, cutting-edge technology, and comprehensive training are showing meaningful results. Turnover improved by an impressive 300 basis points, bringing the combined rate for drivers and technicians down to a record low of 16.8%. These results underscore that when we invest in our people, we invest in the future of our business. These same investments in people, process, and technology are showing up in the WM Healthcare Solutions business as well. Since the beginning of 2025, the team has improved turnover by 21% while also improving on-time service delivery to the highest level in over four years. As we close the third quarter, our results reflect not only strong execution, but also the innovative mindset that continues to set WM apart. From advancing operational efficiency to strengthening our customer relationships, our progress is driven by the ingenuity and commitment of our team. Thank you to all of our employees for the work you do every day to move us forward. And with that, I'll turn the call over to Devina to walk through our financial results in more detail.

Devina Rankin, CFO

Thanks, John, and good morning. Total company operating EBITDA margin was 30.6% in the third quarter, which is the best quarterly result in our history, and that is despite the expected margin headwind from the acquisition of the Healthcare Solutions business. WM's legacy business achieved operating EBITDA margin of 32% in the quarter, meaningfully surpassing our long-standing ambition of sustained operating EBITDA margins above 30%. We achieved these results while overcoming a known 30 basis point headwind from the expiration of the alternative fuel tax credit. Our Legacy Business achieved 120 basis points of margin expansion in the quarter from four primary things: one, continued optimization of business mix with strong municipal solid waste volumes taking the place of low-margin residential volumes; two, our focus on operational efficiencies in our collection and disposal business; three, the scaling of our sustainability businesses; and four, our dedicated focus on reducing costs. The remaining 60 basis points of margin expansion was driven by lower recycled commodity prices in our brokerage business and a reduction in incentive compensation costs. As I mentioned, the Healthcare Solutions business created an expected headwind for our consolidated margins. Our focus on optimizing this business will lessen this pressure over time, and we can already see the benefits of the team's integration and optimization efforts on the margins of this segment, which have improved each quarter since we acquired the business and are now at 17.5%. The key takeaway from all of this is that WM's disciplined focus on driving efficiency and investing in high-return opportunities is benefiting our financial results. Our strong performance continues to translate into robust operating and free cash flow growth. Through the first nine months of 2025, we generated $4.35 billion in cash from operations, an increase of 12% compared to the same period in 2024. This increase reflects our significant earnings growth, partially offset by higher cash interest due to the debt issued last year to fund the acquisition of Stericycle. Capital spending to support the business and our sustainability growth investments are both tracking according to plan, totaling $2.34 billion for the year-to-date period. Putting these pieces together, free cash flow has grown 13.5% to $2.11 billion. Notably, our operating EBITDA to free cash flow conversion approached 42% in the third quarter, reflecting that we have moved from peak investment levels in sustainability growth projects, landfill infrastructure and our fleet into a period where we will harvest strong returns on these investments. Through the first three quarters of 2025, we've returned $1 billion to our shareholders in dividends and allocated more than $400 million to solid waste acquisitions. Our leverage ratio at the end of the quarter was 3.3x, and we continue to track toward our target ratio of between 2.5x and 3x, which we expect to achieve by the middle of 2026. Turning to WM Healthcare Solutions. As Jim mentioned, we're as confident as ever in the strategic value of the acquisition, and we are committed to fully capturing its long-term potential. Revenue trends for this business reflect a more measured pace than our initial projections. This is because we are using a disciplined approach to customer engagement, which means we have offered credits and deferred planned price increases for some of our customers. All of this reflects our focus on maximizing customer lifetime value and building a strong foundation for sustainable long-term growth. Despite the moderation in the anticipated pace of revenue growth in the second half of 2025, we're on track to achieve the targeted operating EBITDA contributions from the acquisition across our total company results because synergy capture has exceeded our initial expectations, internalization of waste into our landfill network has been effective and cross-selling opportunities are proving to be strong. Turning to our total company outlook for the remainder of the year. We remain confident in our ability to deliver the operating EBITDA and free cash flow guidance we provided last quarter. Full-year revenue is projected to be at the low end of our prior guidance range, reflecting incremental weakness in recycled commodity prices and our revised expectations for Healthcare Solutions. With our outstanding year-to-date operating EBITDA margin results and confidence in our continued execution as we close out the year, margin expectations have increased to between 29.6% and 30.2%. In short, we are well positioned to achieve another year of strong earnings, margin, and cash flow growth in 2025 and to build on our success as we go into 2026. Finally, as many of you know, this is my final earnings call as CFO before my upcoming retirement from WM. Over the past 23 years, I've had the privilege of being part of this extraordinary team. Together, we work hard each day to care for each other and our communities and to deliver value to all of our stakeholders. In closing, I must say that my favorite thing about our business has always been the people. I want to thank the entire team for leading the way in service to our customers, the environment and to our shareholders. To our shareholders, thank you for your trust and support. I have complete confidence in the WM team and in David Reed, our incoming CFO, who knows this business deeply and has been instrumental in shaping our financial strategy. I know the future is bright, and I look forward to watching WM's continued success. With that, Olivia, let's open the line for questions.

Operator, Operator

First question coming from the line of Tyler Brown with Raymond James.

Patrick Brown, Analyst

Devina, I've got a couple of housekeeping items. But just year-to-date, how much have you guys benefited from the onetime cleanup work at the landfill? I just want to make sure I have that right for next year. And then secondly, can you go through a couple of the charges this quarter? Has that plastic film plant just been idled based on commodities? Or was that a technology issue? And then what was the genesis of the landfill closure and the charge in renewables? I'm sorry, I know that's a lot, but I appreciate it.

Devina Rankin, CFO

Yes. Let me take them in pieces. So first, with respect to the wildfire volumes, I think it's important to first highlight what John mentioned in his prepared remarks that there was virtually no impact of that in the third quarter. That really was mostly a Q2 item. There was some in Q1. Total revenues for that were around $115 million for the year. And as we've talked about, the flow-through on that revenue is higher than our portfolio flow-through on incremental volume, which tends to be in the 45-ish percent range. As you can imagine, landfill volumes and special event volumes tend to be at the higher end. So you have to extrapolate that in order to think about total EBITDA impact. But I want to reiterate that the strength of Q3 solid waste results really indicate that we accomplished about $145 million in EBITDA growth in that segment without any meaningful impacts from the wildfires. With regard to the charges, I'm going to let Tara address the Natura activities because she'll do that better than I could. But with regard to the landfill impairment that we took in the quarter, that was a really long-term pursuit of expansion at hazardous waste landfill in the Northeast. And we had some news this quarter that indicated that our pursuit would no longer be worth moving forward with and both recorded an impairment of the existing net book value of that and then also reported the impact of an acceleration from former estimates in the expected closure and post-closure costs for the site.

Tara Hemmer, Executive Vice President

So on Natura, it is absolutely market conditions. We built this plant and demonstrated that we could produce a high-quality pellet that customers would buy. But with virgin prices being at all-time lows and some of the minimum content legislation being a bit delayed, the buyers were just not there for the product that we were producing. So we made the decision to temporarily close the operations. We could start it back up, but we're going to monitor what happens with those market conditions going forward.

Patrick Brown, Analyst

Okay. Very, very helpful. Appreciate that. And then, Jim, I very much appreciate the early look on the '26 free cash. But can you give us any help on some of the pieces to get there? I mean would a mid- to call it, mid-high single-digit improvement in EBITDA, which I think is pretty consistent with the Analyst Day makes sense? And then will part of the improvement in free cash be a sizable drop in green CapEx? Just any broad strokes there?

James Fish, CEO

Yes, the growth is coming from various sources. The wind-down of sustainability investments is leading to an increase in related EBITDA, which is significant. Our legacy business is performing consistently well, and we will provide specific numbers in the next quarter. Additionally, we've purchased around 6,000 trucks over the past three years, which is higher than our typical fleet expenditure. We plan to return to a more standard year with about 1,500 trucks, so maintenance capital will play a role in this. Furthermore, Healthcare Solutions is expected to make a meaningful contribution to free cash flow next year. Efforts to reduce integration costs, which have been substantial this year, will help, along with synergies we will fully realize next year. Overall, there are several factors contributing to our optimism about free cash flow. This should give you a clearer picture, and by January, you will better understand the multiple elements that support our positive outlook on free cash flow.

Patrick Brown, Analyst

Yes. No, I totally get there's a lot of pieces. And just if I can squeeze one last one. So I think at the beginning of the year, you guys said that sustainability EBITDA would be up, call it, $280 million at the midpoint this year. It does appear year-to-date on my math, again, this is my math, but it is tracking pretty well below that. I assume there's going to be a step-up in Q4. And then I thought, Jim, I heard you say that you are expecting to hit that target for '25. Is that right? And then two, and Tara, this is my bigger picture question. But with where commodity prices are, where RINs are, do you still have that full confidence in achieving that near $800 million of total incremental by '27? Or should we start thinking about maybe haircutting that a little bit or pushing it out a little bit further? Appreciate it.

Tara Hemmer, Executive Vice President

Let me break this down into parts. First, I'll address the renewable energy business. We are making significant progress on our projects, as Jim noted. Although our earnings may seem somewhat muted this quarter, this is primarily due to our decision to hold off on selling some of our RINs in the fourth quarter because we noticed a slight increase in pricing. Regarding our production volume for 2025, I want to provide some context: we are on track, having doubled our RNG production in the first nine months of the year. We're beginning to see the benefits from those plants. For 2025, we expect our renewable energy business to remain on course. However, the recycling business is lagging, mainly due to commodity price fluctuations. We have made substantial improvements through our automation investments. As Jim mentioned, while commodity prices fell nearly 35%, our EBITDA increased by 18%. This reflects the advantages we are gaining from our investments in labor costs and operational expenses, resulting in our EBITDA margins more than doubling at those automation plants. Looking ahead to 2026 and 2027 for recycling, we previously indicated a potential range of $75 to $150 per ton for the recycling business. We expect a $10 change in our automation investments to correspond to about $8 million. Additionally, for our base business, a $10 change would equal approximately $20 million. Overall, this leads to a new expectation of between $25 million and $30 million for a $10 change. We are very optimistic about our direction. We are monitoring renewable energy pricing and the RINs market, and we anticipate prices for 2026 to fall within the $2.20 to $2.30 range, aligning with our investment strategy.

Patrick Brown, Analyst

And Devina, again congrats.

Operator, Operator

Our next question coming from the line of Noah Kaye with Oppenheimer.

Noah Kaye, Analyst

I'll add the congratulations to Devina for a long career at WM. Thanks for all the dialogue over the years, and we wish you well on the retirement.

Devina Rankin, CFO

Thanks, Noah.

Noah Kaye, Analyst

So now that we know that landfill volume didn't benefit from wildfire in 3Q, can we double-click on the strength in MSW as well as what drove the positive inflection in industrial volumes?

James Fish, CEO

Yes. So volume was a good picture for us this quarter. When you think about industrial, it's been negative for several years now. And so the fact that it ticked up was encouraging. It was pretty evenly spread geographically. Part of that industrial pickup was the conversion of WM Healthcare Solutions hospital customers that moved from other companies to us. So that was a piece of it. I guess you could call that cross-selling, I don't know, but it certainly is a benefit of acquiring the business. Temp roll-off was slightly stronger across a couple of geographies as well. So that contributed. And then you didn't ask about resi, but resi has been negative for a number of years. I think, John, we've talked about it kind of starting to flatten out at the back half of next year, but the volume, the margins have certainly been strong there.

John Morris, President and COO

Yes. If you look at the current quarter and year-to-date, revenue is up despite volume challenges. For the quarter, we had an increase of $10 million in revenue and about 155 basis points. The calculations are still favorable. Regarding the significant volume impact, as we mentioned last quarter, one major franchise affected about 250 basis points negatively in residential print and around 50 to 60 basis points on the commercial side. We expect to see improvement in this area by the end of Q4. We anticipate continued positive trends in residential, potentially dropping below 3 by the first quarter of next year and improving from there.

James Fish, CEO

And then Noah, on landfill volumes, not only was MSW positive, really all waste streams showed nice positive movement. And MSW in particular, I think, is reflecting the strength of our network really more than anything else. It wasn't kind of similar to the industrial line of business. It wasn't something you could point to specifically in one place. It was pretty universal. And so we're pleased with it. But it certainly wasn't a case of us trading price for volume because if you look at the price numbers, they were very strong as well, particularly MSW, I think, was at 6.7% yield. So we're pleased with it. I wish I could give you a better answer other than just the network is very strong and why it's coming to us. The pipeline on special waste, we just heard from our area leaders last week is it continues to look good. So overall, we're pleased with volume numbers.

Noah Kaye, Analyst

Okay. Nice to see the margin guide raised for the year. There's still, I think, a fairly sizable range there for 1 quarter implied. So just broad thoughts on what would take you to the low end versus the high end of that margin guide.

Devina Rankin, CFO

Yes, it's a good question. And what I could tell you is we're optimistic about the margin outcomes. I think that what you're left with is recognizing that with softness on the revenue line, there had to be outperformance in our execution, particularly in the collection and disposal business on margin, and that's what lifts our confidence in the top end of that range. I don't anticipate much that would drive us to underperform on that range. So I do think you're looking at midpoint to the upper end being the most likely outcome for the fourth quarter. With respect to what gives us that confidence, I really think it's important to reiterate that when you look at the 32% collection and disposal margin in the quarter, it's the result of the retention benefits that we've talked about, driving efficiency and safety. It's the fleet investment. It's improved price-cost spread and it's improved mix, which Jim just gave you color on, particularly with those landfill volumes being so strong. So that's what gives us confidence, combined with the fact that, as Tara mentioned, Q4 will be a strong quarter of RIN sales, and those are effectively 100% accretive to margins. So I really expect the fourth quarter to be another strong quarter of margin performance.

Operator, Operator

Our next question coming from the line of Trevor Romeo with William Blair.

Trevor Romeo, Analyst

First one I had was just on the Healthcare Solutions business. If you could maybe just touch a little more on the deferral of the pricing increases. Just maybe like what kind of customers are pushing back and why? And then just in terms of maybe the long-term pricing power of that business, what's your confidence in the ability to eventually get those price increases and achieve the kind of mid-single-digit revenue growth you expect for that business?

James Fish, CEO

Yes, Trevor, I apologize for the lengthy response, but I want to address the price increase aspect and provide some context regarding Stericycle after a year of ownership. Firstly, we believe this investment is exceeding our original expectations, as the current trends strongly favor our business. Articles about the next decade of economic growth in the U.S. often highlight lower birth rates and an aging population, which benefits us. As the population ages, the demand for healthcare services increases. We've realized that Stericycle has a remarkably strong market position that we might not have fully appreciated initially. Regarding pricing, it ties back to the ERP implementation, which Devina will elaborate on. The ERP is progressing well, but it's important to note that companies typically measure ERP implementations over years, not months, and there are always challenges. Our ERP rollout previously encountered issues because it was based on a poorly managed system. Consequently, a few factors impacted our top line, such as deferred price increases and credits granted to customers as we worked to resolve aged accounts receivable. In the last three months, we've cleared one-third of these past due accounts, consisting of both cash collections and credits. Most of these credits are one-time adjustments for customers, and while there is some churn occurring, it’s manageable. Overall, we believe that the synergies are exceeding our initial expectations, as Devina indicated earlier. We have a strong team dedicated to the ERP implementation and are navigating various initiatives, including a new invoicing process for customers. Our systems are finally integrated, enhancing our efficiency. This isn't just a possibility; we see it as a success, with benefits likely becoming evident to customers by 2026. While our internal improvements may not be immediately visible to customers, they will appreciate the new invoice process. In summary, we are very optimistic about our trajectory, recognizing the strength of our strategic position and the significant progress we are making on multiple fronts.

Devina Rankin, CFO

And Trevor, I'd just like to underscore one thing, I think, to address your question very directly. And that's that this was not a step that we took as a reaction to pushback from customers, quite the opposite. It was a step that we took because WM does the right thing for our customers. And so whether it's the credits or the customer-centric evaluation of service and contract that was necessary for us to ensure that we're taking the right steps with price increase, those were things that we did because we do things the right way. And you'll just see effectively a restabilization of revenue as we get into 2026 outlook. But I think this housekeeping that you're seeing in the third quarter was necessary for us to focus on customer lifetime value and a long-term growth portfolio that we know exists because this is the best platform in the business for regulated waste service, particularly in North America.

John Morris, President and COO

And maybe, Trevor, to add to Jim's long answer, I'll extend it just a minute. At the end of the day, the strategic value of the health care business has been highlighted in comments by Jim and Devina. Additionally, when you look at it, it's about 10% of our business when everything is settled. If you examine the Legacy Business or the core solid waste business, it boasts margins over 38%, with SG&A and a somewhat soft revenue quarter at 9%. There's significant strength in the Legacy and core business, and we believe that it will continue to perform well throughout the rest of the year and into next year. Moreover, we're going to benefit from all the improvements the team is implementing in relation to the health care business. This is another reason why we feel very optimistic about what our free cash flow will look like for next year.

Trevor Romeo, Analyst

All right. That was really helpful. John, that's a good segue into my follow-up question. Looking at your price/cost spread for next year, it seems like things are on track now. Your pricing yield appears to be leaning towards the lower end of your expectations for this year, but costs are still looking solid. Your turnover and incident rates seem to be improving, which may indicate a potential for wage inflation to decrease next year. How are you approaching both aspects of that spread as you look beyond this year?

John Morris, President and COO

It's a good point there, Trevor. I spent a good bit of time looking. I looked at it a few different ways. If you look at sort of the yield for the traditional solid waste business for the quarter, it's 4.1%. If you look at core price at 6%, and you compare that to sort of CPI, CPI for at least our math is right around 2.9%, 3%. So I think we continue to see a good spread between core price yield and operating expense pressure. And I think as I mentioned in my prepared remarks, another quarter under 60% with a little momentum on a year-to-date perspective. So we feel good about the cost/price spread. And I think the other thing we've talked about for the last number of quarters is that our commercial and industrial pricing has always been solid and consistent, but you're seeing continued improvement and consistent levels of pricing across our landfills, across our entire post-collection network and still in our residential business. So I think the fact that we've syndicated sort of our pricing strategy in a more effective way gives us a lot of confidence going into next year on that spread you mentioned.

James Fish, CEO

You might mention, John, driver turnover because that's been an incredibly good story for us.

John Morris, President and COO

Yes, that's important to highlight. When we examine our risk costs and safety metrics, we see significant improvements across various measures. Our labor ratios are benefiting because our team has dedicated considerable effort over the past couple of years, especially after the pandemic, to manage these numbers effectively and enhance them consistently each quarter. As I noted, the turnover rates for drivers and technicians have reached an all-time low for the company, which is reflected in several metrics I outlined in my prepared remarks.

Trevor Romeo, Analyst

And Devina, my congratulations to you as well.

Operator, Operator

Our next question coming from the line of Toni Kaplan with Morgan Stanley.

Toni Kaplan, Analyst

I was hoping you could talk a little bit more on what's going on with yield and also just in the quarter, but also looking into 2026, how your conversations with customers have been going at the end of the year here?

James Fish, CEO

Yield is what we discussed earlier, with MSW performing strongly at 6.7%, commercial at 4.7%, and residential at 6.5%. We are pleased with both yield and core price. Our primary goal regarding pricing is to cover costs and add some margin beyond that. Our margin results reflect this, showing resilience despite some challenges we faced. We don't focus solely on the absolute numbers; as costs decrease, we have noted that our yield may decrease slightly as well. However, our aim is to maintain a healthy difference between cost and price.

Toni Kaplan, Analyst

I was wondering about the industrial yield, which seems to be at its lowest since COVID. You've mentioned mix and temporary roll-off being somewhat weak in previous quarters. While you indicated it was a bit better this quarter, are those still the same factors affecting it? Specifically, why did we see a lower yield of 2.3%?

John Morris, President and COO

I believe you highlighted some key points, Toni. Several factors are influencing the situation. Firstly, as we discussed, part of the volume increase is coming from the health care sector as we bring some of that in-house. Additionally, the temporary business has shown some recovery and is not as negative as before. While temporary work is typically lower priced than permanent work, it can still be profitable. That’s certainly a point worth emphasizing. Furthermore, we also noticed a slight increase in our permanent hauls from some of our long-term customers, although it wasn't significant. This is what is impacting the yield. However, as Jim noted, when we consider our core price at 5.7% for industrial and the overall margin in our collection and disposal business at 38.4%, the numbers look solid.

James Fish, CEO

It may also be a bit of a mix issue with respect to national accounts when you look at yield. That's why core price is an important metric for us to consider as well.

Toni Kaplan, Analyst

Okay. Great. And then just as a follow-up, when you think about the M&A pipeline, how is that looking? How are valuations looking? And should we expect '26 to be sort of a bigger year or still digesting the health care business? Just where are we on sort of M&A strategy?

John Morris, President and COO

Well, I think you heard a good bit of color from Jim and Devina on what we're doing in health care and where we are sort of in the integration there. We made a big step. The business is now fully integrated into our 16 areas. So we feel good about the momentum there. Separately, on the traditional solid waste side, I think we've closed about $450 million year-to-date, and we said that number could be as big as $500 million by the end of the year. And it could still be. We've got a handful of transactions that are out there that could close in Q4 or could roll into next year. But I think with regard to '26, sitting here today, I think probably somewhere in the normal $100 million to $200 million is what we're looking at now. But as we've demonstrated over the last couple of years, when the right strategic solid waste asset pops up, we've certainly got the capacity to do that. We're going to take the same approach into next year.

James Fish, CEO

Yes. I think it's important to mention that as we consider mergers and acquisitions for next year, it really ties into our approach to capital allocation for the upcoming year. We'll provide more details in January. With $3.8 billion in free cash flow from our sustainability businesses and Healthcare Solutions, along with strong cash generation from our Legacy Business, it likely means that while the dividend will be prioritized, there will also be opportunities for mergers and possibly a significant share repurchase next year. We'll determine the exact figures by July.

Operator, Operator

And our next question coming from the line of Jim Schumm with TD Cowen.

Jim Schumm, Analyst

I was wondering on the WM Healthcare, would you be able to give us a sense of how the medical waste is performing and how the document destruction businesses are performing?

John Morris, President and COO

Well, addressing some of Devina's earlier remarks about the credits we've given to customers, these credits have mostly been related to our regulated medical waste segment. This is largely in response to years of frustration with the ERP implementation, reflecting our commitment to a customer-first approach and ensuring a solid foundation for growth. We have seen some customer turnover on the hospital side, but we continue to acquire new customers at a strong pace. It's important to highlight that we have renewed nearly $200 million in contracts with our large customers, with an average price increase in the low double digits. This gives us a solid outlook. As we stabilize this area of the business and establish a strong base for growth, we expect to see the benefits of those price increases materialize in the latter half of 2026. On the auto shred side, we faced some challenges at the beginning of the year mainly due to miscommunications between our commercial and operations teams. Those issues have been resolved, and we're successfully bringing this high-margin business back on track. Auto shred is also where we quickly implemented our sales coverage optimization, resulting in increased productivity in our pipeline and closure rates, and we are pleased with the progress. Overall, concerns about the melting ice cube effect are not as significant for us anymore.

Jim Schumm, Analyst

Okay. On a positive note, you mentioned the volumes from Legacy and Stericycle entering your landfills. Can you provide any quantification of that benefit for us?

Devina Rankin, CFO

So basically, when we think about how we outlined synergy value, we talked about $80 million to $100 million in 2025 of synergy value. You can think of it as being about 1/5 of the synergy realization to the year.

Jim Schumm, Analyst

Okay. I have one last question regarding the hazardous waste landfill. I want to confirm my understanding. Were you attempting to develop an additional hazardous waste landfill that didn’t happen, or are you closing an existing one? Also, how many hazardous landfills do you currently operate? Are you able to provide an update on that?

John Morris, President and COO

Yes. So the answer to the question is that the site that we're referencing that was shuttered has actually not been operational. We've kept it on life support, if you will, while, as Devina mentioned, we were pursuing a permit expansion. So it's not a loss from our existing portfolio. It hasn't been operating in a meaningful way in a number of years.

Operator, Operator

Our next question coming from the line of Rob Wertheimer with Melius Research.

Robert Wertheimer, Analyst

I just had a quick clarification on an earlier comment with respect to Healthcare Solutions doing more traditional waste. I think you said, I guess you could call it cross-selling. It sounds a whole lot like cross-selling. So I was wondering if I missed the subtlety there. And then just more generally, how does your cross-selling kind of sales effort ramp up over time?

James Fish, CEO

Yes. You're probably referring to the comment I made about our industrial volumes and how we were taking volumes from what would have been under the old company going to a competitor and then internalizing them into us. So that's really what that is, our solid waste volumes coming to us in the industrial line of business through internalization of that volume.

Robert Wertheimer, Analyst

Okay. Perfect. And then just in general, your progress along cross-selling on health care?

Devina Rankin, CFO

It's been very strong. And there are some great examples where we've had exactly what we've talked about where the national accounts business platform for WM has been a long success story for us. But the health care sector was one of those where we were underrepresented relative to our share in other important segments of our customer base. And we've seen great success in leveraging, I would say, the WMHS customer base in order to extend traditional solid waste performance across that national accounts platform. And then we've also seen success the other way, where we've taken Legacy WM customers and thought about shred opportunities or even using the Healthcare Solutions platform in order to deepen the customer relationship. I think what's really important there is that when you become that single source provider for a customer, that customer relationship will be longer and provide incremental value. So that's another leg of that focus on customer lifetime value that we've been talking about.

John Morris, President and COO

Maybe, Rob, one more finer point there. Jim referenced in his script one particular customer that has increased their annual spend by about $5 million across their multistate network. But that's certainly an evidence of cross-sell there. By the way, there are several customers that have increased their spend in the 7-figure annual revenue range with us. But maybe what's even more exciting is that we're also seeing cross-sell in our independent RMW shred-it small and medium-sized customers. We've actually completed cross-sales for over 7,000 customers. Now those are small customers, but those end up becoming the backbone. And what we've seen is that customer split is basically 50-50 between WM and Stericycle original books of business.

Operator, Operator

And our next question coming from the line of Faiza Alwy with Deutsche Bank.

Faiza Alwy, Analyst

I wanted to follow up on the same topic. It seems like you're discussing success in cross-selling, but at the same time, you're also mentioning higher churn in the health care sector. I'm curious if you could provide more details on whether there is a specific type of customer or region where you're seeing stronger performance in cross-selling compared to where you're experiencing higher churn.

Rafael Carrasco, Executive Vice President

The success we’re experiencing with cross-selling is evident across all channels. I previously mentioned the 7,000 customers we have cross-sold, mainly small and medium-sized businesses. We have also made progress with some of the larger, more complex hospital networks. The churn we've observed in the hospital sector primarily affects those customers who have faced significant frustration in recent years. These were the customers who encountered issues with their billing during the Monarch project implementation in late 2023 and early 2024. Despite this, we have also seen our customer additions in the hospital sector remain quite strong.

James Fish, CEO

I think it's important to highlight that while we've experienced some churn, it's not unusual given the strength of Stericycle's network, which is unmatched by any competitor. The churn we've seen is not exceptional. As we finalize our ERP systems and fully integrate the business into our operations across 16 areas, I believe we can anticipate improved numbers in revenue growth, between 5% and 6%, with synergies becoming clearer rather than obscured by the overall revenue. Additionally, it's crucial to note that this segment represents only 10% of our business, while the remaining 90% is performing very well. Overall, we are satisfied with the progress made.

John Morris, President and COO

I think the only thing I'd add to that, Jim, and I mentioned earlier, it's worth highlighting here is the service is good. I mean when we look at the health care portfolio of services, Rafa and the entire team have done a nice job, as I mentioned, on improving one KPI, which is on-time delivery. So service, if it were a challenge, it's the harder one is hard to fix. In this case, we have the benefit of providing solid service.

James Fish, CEO

I think their numbers end up being better than our own numbers on the Legacy side.

Rafael Carrasco, Executive Vice President

And by the way, that churn number is also better on that segment than on the Legacy side anyway.

Faiza Alwy, Analyst

Understood. Very helpful. And then just maybe pivoting to the core business. You mentioned lower maintenance, lower risk management costs. So how much more runway do you think you have in this as we look ahead to 2026 and beyond?

John Morris, President and COO

So I would tell you, it wasn't that many handful of years ago, we were at the 63-plus percent range. And gradually and systematically, we've worked our way down under 62%, 61% and now under 60%. And we think that's obviously a pretty big accomplishment for us. To answer your question, is there room to run there? Absolutely. I think you've seen the momentum from above 60% to below 60%. We have some numbers aspirationally over the next handful of years that we'd like to achieve that are better than the 59.4% that we printed this quarter.

James Fish, CEO

I believe it will require a new approach to business. John has a team focused on this initiative. It's not just about improving our current methods; it's about changing how we operate. If we merely attempt to extract more from our existing business without evolving, then we've likely already maximized our SG&A and OpEx savings. To reach the ambitious targets John mentioned, expect us to implement new strategies. This includes leveraging technology to enhance our operations and utilizing AI to replace labor as needed.

Operator, Operator

And our next question coming from the line of Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

One follow-up question on the topic of churn. I found your comments quite interesting. Could you comment on where these customers that are churning are going to? The reason I asked that question, and like you mentioned earlier, Stericycle had very strong market share. Hence, I'm curious, are they churning for price, network, something else? And related to that, would you expect to win some of these customers back once the ERP is in a good spot? Or are these customers not profitable enough to go after?

Rafael Carrasco, Executive Vice President

Well, there's a lot in that question. I'm going to try to give you some nuggets that you can take away here. But first and foremost, we're having exit interviews with those customers. And by the way, a lot of times, what we're losing is not the entire customer, but a piece of the customer. And the reason for that is that there's no other competitor out there that can actually handle the entire network of hospitals that is associated with the customer. And so when you ask the question, do we have the ability to go back and gain that customer? The answer is absolutely yes because they're going to want to gravitate back to a single provider.

Operator, Operator

And our next question coming from the line of Konark Gupta with Scotia Capital.

Konark Gupta, Analyst

I want to address the 10% business you mentioned, Jim, as it's important in the overall context. Your SG&A intensity in Healthcare shows a notable gap compared to the Legacy Business, which was 10 points in Q3, 12 points in Q2, and 14 points in Q1. The gap has been decreasing sequentially, and at this rate, you might reach your synergy target in the next few quarters. I wanted to confirm if we are correctly understanding that SG&A intensity is decreasing nicely and is on track to hit your target soon, or if there are other factors contributing to the faster reduction in SG&A intensity in the first three quarters.

Rafael Carrasco, Executive Vice President

Yes. To clarify, since the third quarter of last year, SG&A has decreased by approximately 700 basis points, which is a significant reduction. Some aspects of this decline were relatively easy to achieve. We are now adopting a more precise strategy to ensure we can do two things: first, sustain the improvements we are making with the ERP system, and second, adjust our customer care strategies to better serve our larger, more complex customer base while also enhancing collaboration between the sales and operations teams. We saw solid improvements in 2025, and we expect that trend to continue into 2026 before it stabilizes. However, our goal is to reduce SG&A to 17% over the next three years, which we believe is attainable, with further opportunities for reduction available.

James Fish, CEO

The performance of SG&A is even more notable than Rafa suggests, especially considering the softness in revenue. We are measuring it as a percentage of revenue, and Rafa and his team have made significant strides in managing costs. As we mentioned regarding revenue, some changes are temporary, while others can be recovered. However, as revenue begins to rise again, it will also enhance SG&A as a percentage of revenue.

Konark Gupta, Analyst

I appreciate the color on that. And if I can follow up on the recycled commodities. I think you guys noted 35% decline in Q3. What are you seeing now based on the book that you are left with? What kind of basket of commodity prices you're looking at heading into Q4 and early '26?

Tara Hemmer, Executive Vice President

Well, as you all saw, commodity prices have dipped and a couple of reasons for that. If you're looking at OCC prices, we've seen some mills closed down domestically, about 10% of capacity has been taken out, and we're seeing weaker box demand. So certainly, if the economy picks back up and we see more consumer spending, we would see an uptick in OCC prices. And you heard my previous comments related to plastics. Plastics are at all-time lows. But when you look at commodity price trends, typically from peak to trough, roughly 12 to 24 months. So we would expect a bit of a bounce back sometime in 2026. We're not expecting that in Q4 of 2025. We're expecting commodity prices to remain around that $65 to $68 a ton basket, and that's what has been included in our recent update. But overall, still feel very optimistic about the investments we've made. We've been taking out labor out of our facilities, which is good in any commodity price environment and certainly creating cleaner material, which we can sell at a higher price point.

Operator, Operator

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

Kevin Chiang, Analyst

Echoing the congratulations, Devina, best of luck in your future endeavors. Maybe just on RNG. I think at the Investor Day, you had mentioned that, I guess, in 2026, you had secured about 30% of the volume at a fixed price. RIN prices have moved up a little bit here in Q4. Just wondering if that ratio has changed as we think about the fixed versus variable into next year.

Tara Hemmer, Executive Vice President

For 2026, we've presold approximately 45% of our offtake, which is an increase from our last update. We expect that just under half will be allocated to the transportation market, while slightly more than 50% will go to the voluntary market. 2026 will be the year we allocate our entire fleet to WM's RNG production. We're observing RIN prices for 2026 in the range of $220 to $230, and we're still seeing interest from buyers in the voluntary market, with progress being made there.

Kevin Chiang, Analyst

Okay. That's really helpful in the update. I know you've had many questions about health care. If I could ask a broader question: When you consider the price elasticity of this business while trying to implement price increases and enhance your revenue strategy, is it consistent with what you anticipated a year ago? Also, how does it compare to solid waste now that you have some experience with it? I'm just curious about your overall perspective on the pricing and demand dynamics after nearly a year of ownership.

Rafael Carrasco, Executive Vice President

Well, lots has happened in that year. I think what I would say is we start maybe with our long-term vision and then move backwards. We've talked about that maybe aspiration of 5% to 6% growth overall being realizable long term. What we found is that, as Devina mentioned, we're taking a slower, more deliberate approach with that, particularly in the price increase because the last thing you want to do is put a PI through to a customer, particularly a large complex customer that has been going through a tremendous amount of frustration with their billing or their reporting over the last couple of years. That said, once we have offered that credit and baseline that customer better, we don't see any reason to doubt that we're going to be able to put in the particular PIs increase that we are entitled to. And I would just point you once again to the example I gave earlier about some of the renewals we've had of about $200 million worth of that business that we've been able to renew with an average low double-digit PI.

Devina Rankin, CFO

I would just double down on that and say there's some really important fundamentals there. One is the secular trends that we've discussed. So from a supply and demand perspective, the demand for our business is just going to continue to grow. Two is the quality of the customer service, the quality of the customer service, our on-time delivery, all of that is strong. That's really supported by a best-in-class Net Promoter Score for that part of the business. And then three, I just think of it in terms of the strong execution, data-driven approach that WM has established and that we show quarter in and quarter out for the collection and disposal business, we're going to be able to leverage that know-how for this business segment. We're just going through this period of housekeeping, I would call it, that is appropriate and doing the right thing for our customers. So I think those things bolster our confidence in that long-term price outlook for the business. And I think we're more confident in that today than we were a year ago.

Kevin Chiang, Analyst

And again, congrats Devina.

Operator, Operator

Our next question coming from the line of Shlomo Rosenbaum with Stifel.

Shlomo Rosenbaum, Analyst

I wanted to talk a little bit about the industrial volumes turning up. And if you kind of exclude the internalization of the Healthcare Solutions, are we starting to see an uptick just in general? Do you feel like we're just kind of bouncing around a little bit off the bottom? It's certainly notable that it's the first positive number in 3 years. I want to see what you think that is indicative of just in general in your customer base.

John Morris, President and COO

So I think if you look at that industrial, I think you hit on the key point, which is the first quarter in many that we've seen a positive uptick. And if you discount out the health care service volume, it's about 50 basis points of the increase. So net of that, we've still seen an increase in our volume. And I mentioned it's a little bit of a less of a drag from the temporary business. And historically, that's lower priced than permanent work, but that doesn't mean it's not as profitable. So that's one I would certainly point to. And I think the other thing we saw is a little uptick in our permanent hauls, too, from some of our permanent customers, not meaningfully, but it was an uptick. But that is what's affecting the yield. But I think, as Jim mentioned, when you look at our core price at 5.7% for industrial and the overall margin in our collection and disposal business at 38.4%, I think that the math puts out pretty well.

James Fish, CEO

I think you got it. Like I said, half of it is health care and half of it is unrelated to that. And as I mentioned, part of the yield push was the fact that the temp business is profitable, but it doesn't bring the same top line revenue. So it does put a little pressure on yield. But as you think about our margins in the collection business or collection and disposal business, I think those speak for themselves. Those are the 2 contributing factors net of the health care. And like I said, that's about half of the improvement.

Operator, Operator

And our next question coming from the line of John Schumm with TD Cowen.