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Text: You'll 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.
John will discuss our results in areas of yield and volume, which unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume.
During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization.
Any comparisons, unless otherwise stated, will be with the third quarter of 2020.
Net income, EPS, operating EBITDA and margin, operating expenses 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.
wm.com for reconciliations to the most comparable GAAP measures and additional information of our use of non-GAAP measures and non-GAAP projections.
Time-sensitive information provided during today's call, which is occurring on October 26, 2021, may no longer be accurate at the time of a replay.
Our third-quarter performance highlighted the exceptional cash generation capability of our business model as we generated nearly $1.2 billion of cash from operations.
Our solid results put us on track to meet the higher full-year financial outlook we provided last quarter, even as we faced some of the highest inflation that we've seen in years, along with the labor and supply chain constraints.
Virtually no segment of the economy, including government and the private sector, has been unaffected by these historically acute inflationary and supply chain challenges.
This burst of inflation accelerated through the third quarter, and during the quarter, we saw roughly $60 million of labor inflation and about $100 million of inflation in other operating cost categories.
Overall, our underlying labor inflation for the third quarter was 8.7%.
So that's the tough news.
The good news is that the business continues to perform well as demonstrated by the fact that we still expect to finish the year within our previously adjusted operating EBIT raise, adjusted operating EBITDA and free cash flow guidance ranges.
And we will be above our prior revenue range due to strong price execution and strengthening volumes.
John, Devina and I will discuss what we're doing about these labor and inflationary pressures in the short term and the medium term.
Not surprisingly, our disciplined price programs are the primary lever to combat cost inflation.
Our pricing programs delivered core price of 4.6% and collection and disposal yield of 3.5% in the third quarter.
Standout performance continues to be the residential line of business with a yield of 5%, while MSW yield improved to 3.5%.
But keep in mind, the price escalations on about 40% of our revenue are tied to an index, often based on a look-back over the prior year, so there's a timing lag in adjusting index pricing when costs step up as quickly as they have.
And it's important to understand that a portion of the remaining 60% of our business won't get the full 7% to 10% price increases we believe we need to cover rising costs until their next price increase cycle.
A customer who has increased 4% in May won't get the full cost recovery price increase until next May.
That said, we're seeing a favorable price environment across our open market businesses, evidenced by our lowest level of rollbacks in more than a decade.
We're very focused on directly addressing the labor challenges.
John will discuss the quarterly impact and how we're working to address this immediately.
Strategically, we're looking at this acute challenge as an opportunity to expedite the automation of certain jobs.
We said previously that we view the automation of certain high turnover positions as both a competitive advantage and a derisking mechanism in today's labor market where certain jobs simply don't attract the interest they previously did.
The most recent examples of that are the customer setup role, which we just finished fully automating and the 35-plus percent reduction in labor we've seen where we've upgraded and rebuilt our single-stream recycling plants.
Given the success of these rebuilds and the labor inflation challenges of late, we've accelerated the retooling of the remaining single-stream plants and expect to address 90% of single-stream volume by the 2023-2024 time frame.
In the quarter, we saw some of the positive impacts of those new single-stream plants in our outstanding performance in our recycling business.
Earnings contribution and margins for recycling were at their highest level ever, driven by strong demand for recycled material and great operating performance from the new state-of-the-art MRFs.
We were equally pleased with results in our renewable energy business in the quarter, where robust growth continued, driven by more RINs sales and higher prices.
With our long-standing expertise, continued growth in sustainability solutions and unrivaled asset network, WM is uniquely situated to support our current and prospective customers in their evolving sustainability needs.
Our customers are increasingly seeking circular solutions for their materials, which is causing growing demand for recycled content.
Of note, our focus on unlocking more plastic from the waste stream drove a 25% increase in plastics we recycle since 2019.
Recycling and renewable energy are two of our key growth areas, highlighted in our annual sustainability report published earlier this month.
The report outlines the progress WM has made against our sustainability goals and details investments we've made to advance our sustainability journey.
In particular, this year's report focuses on the people behind the progress WM has made in the past year and how they are doing their part to take care of our customers, neighbors and the environment and communities across North America.
The bottom line for the quarter is this: we generated higher-than-expected volume and revenue growth in the third quarter, which positions us well for 2022.
At the same time, we faced an unexpectedly acute and fast-moving challenge from the inflation, supply chain and labor shortage headwinds, and we managed our way through it well and still expect to achieve results within our 2021 guidance ranges.
And this challenge presents an opportunity for us to move more decisively in those strategic areas of automation, sustainability and workforce planning to further separate ourselves in this industry.
They continue to deliver, driving another quarter of double-digit growth in revenue, operating EBITDA and free cash flow.
Our team continues to execute very well despite a challenging operating environment, producing more than 7% organic revenue growth in collection and disposal business in the third quarter.
This growth, combined with continued integration of Advanced Disposal, drove operating EBITDA more than 14% higher.
As Jim mentioned, we are seeing pressure on labor and other cost categories, and we are addressing these impacts through our pricing programs, controllable cost management, efficiency improvements and workforce planning.
Adjusted operating expenses as a percentage of revenue increased 180 basis points to 62.2% in the third quarter as we experienced pressure from inflationary costs, supply chain constraints and stronger-than-expected volume growth.
In particular, costs related to the hiring and training of new employees impacted labor costs in the third quarter.
We also saw overtime hours increase as the team adjusted to meet the higher-than-expected collection volumes.
We anticipated a good portion of this labor pressure that is showing up in our costs as we made proactive market wage adjustments earlier in the year to get in front of labor shortages and meet growing demand.
At the same time, we are working to automate a number of roles where we see longer-term challenges to attract and retain employees.
In the residential line of business, we continue to work through the last 40% of our routes, including those from ADS that are not fully automated while continuing to be very selective in the business we are willing to take on, as evidenced by our yield and volume results in the third quarter and the last few years.
While we're now incurring the costs associated with these investments, we are only in the early stages of seeing the benefits.
The labor market supply chain constraints have accelerated in Q3, coupled with robust volume growth in the third quarter, have also added pressure in our fleet operations.
Repair and maintenance costs are increasing as we hire additional technicians and incur some overtime hours to address the strong volume growth we continue to see in the collection lines of business.
Similarly, we've had to temporarily place some of our higher-cost trucks back in service to address the volume demands.
In addition, our third-party subcontractors at our transfer stations are facing similar pressures and are passing those increased costs on to us.
Overall, efficiency in the collection business in the third quarter adjusting -- improved in the collection business in the third quarter, adjusting for increased training hours.
The fundamentals of our business remain strong, and we are committed to recovering our cost increases through pricing and again, taking the most expensive truck off the road and reducing the most expensive hour of the day.
Now I want to focus on several of the positives in the quarter.
Turning to our strong revenue results, third-quarter collection and disposal volume grew by 3.8%, which outpaced our expectations.
We continue to see strong volume, driven by economic reopening with commercial volume up 4.6% and special waste volume up by 16.6%, and we see runway for continued solid performance in the fourth quarter.
Customer metrics were also strong in the quarter.
Service increases outpaced service decreases by more than twofold for the second consecutive quarter and churn was 8.7%.
Year to date, net new business for small and medium business customers is up more than 10%.
And finally, our integration of Advanced Disposal continues to go smoothly.
We've combined around 70% of the acquired operations into our billing and operational systems, and we remain on track to migrate virtually all the ADS customers by the end of the year.
We've achieved nearly $26 million in annual run rate synergies during the third quarter, bringing the year-to-date total to $60 million.
Combined with the $15 million of annual run rate synergies realized in the fourth quarter of 2020, we're on track to reach $100 million by the end of the year.
And we continue to forecast another $50 million to be captured in 2022 and 2023 from a combination of cost and capital savings.
As we have seen all year, robust volume growth, strong recycling commodity prices and increased collection and disposal core price continued to deliver top-line growth ahead of expectations in the third quarter.
As a result, we are once again updating our revenue outlook for the year.
Total company revenue growth is now expected to be between 17% and 17.5%, with yield and volume in our collection and disposal business of about 6.5%.
This guidance also includes an expectation for continued strength in recycled commodity prices and RIN values.
We're confirming our most recent 2021 adjusted operating EBITDA guidance of between $5 billion and $5.1 billion, which is an increase from the prior year of about 17% at the midpoint and almost 5% higher than our initial outlook for the year.
Third-quarter SG&A was 9.7% of revenue, a 40-basis-point improvement over 2020.
Included in our results is about $16 million of increased digital investments as we advanced technology that will benefit customer engagement and lower our cost to serve over the long term.
We remain focused on managing our controllable spending, making sure that we allocate each dollar to initiatives that will enhance our business.
Third-quarter net cash provided by operating activities was $1.18 billion, an increase of 15%.
Cash from operations growth continues to be driven by our robust increase in operating EBITDA, including the contributions from the ADS acquisition and lower interest costs.
While there was a modest unfavorable working capital comparison in the third quarter, due in large part to the timing of cash from CNG credit and our deferral of payroll taxes in 2020, overall, improvements in working capital demonstrate the benefit of tools we are putting in place to enhance our systems and processes.
In the third quarter, capital spending was $464 million, bringing capital expenditures in the first nine months of the year to $1.13 billion.
Our 2021 pace of capital spending has continued to be slower than we planned due to supply chain constraints and construction project work taking longer than planned.
As we discussed last quarter, we are proactively pulling forward capital investment, particularly in recycling, where we know the returns will be strong.
Investments in recycling technology and equipment at our MRFs are expected to be about $200 million for the year.
While we continue to target full-year capital spending at the low end of our $1.78 billion to $1.88 billion guidance range, we could see 2021 coming in below targeted levels, with some of our spending pushed into 2022, primarily due to supply chain constraints.
We generated $773 million of free cash flow in the third quarter.
And through September, our business generated free cash flow of $2.29 billion, seeing us well on our way to our full-year targeted free cash flow of $2.5 billion to $2.6 billion.
We've returned more than $1.7 billion to our shareholders through the first nine months, paying $730 million in dividends and repurchasing $1 billion of our stock.
We continue to expect to repurchase up to our full authorization of $1.35 billion in 2021.
Our leverage ratio at the end of the quarter was 2.71 times as the strength of our business performance and the successful integration of the acquired ADS business drove the achievement of our targeted leverage ratio ahead of plan.
As we enter the final stretch of 2021, our teams are focused on accelerating our disciplined pricing programs, managing our controllable costs, positioning WM as an employer of choice and capturing growing volumes.
We know our strategy sets us up for a solid finish to 2021.
With that, Erica, we'd be happy to address the team's questions.

user
compname says total company revenue growth in 2021 is expected to be between 17% and 17.5%.
compname says adjusted operating ebitda is expected to be between $5.0 billion and $5.1 billion in 2021.

assistant