WM Third Quarter Earnings Conference Call - WASTE MANAGEMENT INC

Explicit Guidance:

• Full-Year 2026 Outlook: Management expects to finish at the high end of prior ranges for revenue and free cash flow; operating EBITDA is expected to remain within the original full-year guidance range established at the start of the year.
• Full-Year 2026 Metrics: Full-year SG&A is expected to be approximately 10% of revenue; core volume is expected to be negative ~1% (or negative 50 bps excluding wildfire cleanup volumes); fuel cost headwind assumed to be ~40 basis points impact on margins for the full year.
• Q4 2026 Expectations: Margins are expected to improve sequentially in Q4 (potentially the best margin performance of the year), though year-over-year margin comparison may be lower due to the fuel headwind; Q4 EBITDA range remains ~$100 million.
• 2027 Outlook (Forward-looking): Full 2027 production volume is ~40% contracted; Renewable Natural Gas (RNG) long-term pricing target of $26/MMBtu remains achievable with expectations to land near $27 for 2026; RNG EBITDA ramp expected to increase in 2027 as facilities reach full run-rate; 2027 volume trends for Healthcare Solutions anticipated to improve to positive, though no specific guidance provided yet.

Business-Segment Outlook:

• Collection & Disposal: Strategic priority on tuck-in M&A; $140 million in acquisitions expected to close in Q4 2026, with an additional $250 million transaction expected to close early 2027; pipeline remains robust through 2027; core price expected to remain strong with disciplined pricing; landfill operating costs expected to persist and increase (e.g., California legislation) with full cost pass-through via pricing.
• Healthcare Solutions: Exited Q3 2026 with core price of 5.5% and SG&A of 15.2% of revenue (meeting year-end targets early); EBITDA margin target of 17% achieved; long-term SG&A goal to approach core solid waste levels (9-10%) remains a stretch but remains a long-term aspiration; volume trends improving with expectations for positive growth in 2027.
• Sustainability (Recycling & RNG): 18 RNG facilities online with one more in Q4 2026 and final one early Q1 2027; ~90% of 2026 production and 40% of 2027 production contracted; EBITDA from renewable assets expected to roll over positively into 2027; recycling commodity prices and volumes expected to contribute to growth.

Market and Competitive Outlook:

• Demand Trends: Commercial line of business volume remains under pressure due to business formation slowdown related to housing/construction, though industrial roll-off volume is flat/slightly positive; residential volume losses are expected to stabilize and trend positive in the second half of 2026 into 2027.
• Pricing Environment: "Higher for longer" pricing environment anticipated to support price-to-cost spreads; ability to pass through inflationary costs (fuel, landfill, regulatory) remains strong; core price/yield spread expected to sustain in the low-60s to low-70s range.
• Volume Mix: Special waste pipelines reported as "very strong" in 16 of 16 markets, with expected volume realization in Q4 2026 or early 2027; landfill volume softness expected to persist due to economic headwinds.

Macro / Industry Outlook:

• Fuel Costs: Q4 2026 diesel price assumptions include a ~40% increase year-over-year (approx. $5.50/gallon); fuel surcharge program is effective in recovering costs with an approximate one-month lag.
• Regulatory: California new landfill monitoring legislation (AB 28) expected to increase operating costs, likely to be passed through to customers; PFAS regulations remain a "watch and see" item with potential cost headwinds that are believed to be manageable via pricing.
• Economy: Construction and housing activity remains weak (housing starts ~1.2M vs historical highs), impacting C&D and commercial volumes; broader economy showing muted growth, influencing business formation.

Strategic Initiatives:

• Leadership Transition: Jim Fish retiring early January 2027; John Morris becoming CEO; succession process described as thoughtful and deliberate; full confidence in the senior leadership team's ability to execute.
• M&A: Aggressive tuck-in M&A in core solid waste remains a top priority; ~$239 million completed YTD 2026; robust pipeline with interest in large spin-offs of core solid waste assets; balance sheet capacity to pursue both small and large strategic transactions.
• Technology & Operations: Continued embedding of AI, routing algorithms (NDO), and robotics to drive structural cost reductions and labor efficiency; long-term CapEx run rate expected to normalize to 10–10.5% of revenue (down from 9.5% in 2026); remote heavy equipment pilots at landfills to address labor shortages.
• Capital Allocation: Commitment to returning >90% of free cash flow to shareholders via buybacks and dividends; leverage target maintained at 2.5x–3.0x (ended Q3 at 2.92x).

Risks and Headwinds to Outlook:

• Fuel Volatility: Significant year-over-year diesel price increases could impact near-term margins before surcharge recovery.
• Regulatory & Compliance: Potential new PFAS regulations and California landfill monitoring rules could increase operating expenses if pass-through is limited.
• Economic Sensitivity: Residential intentional shedding and commercial business formation slowdowns could delay volume recovery into 2027.
• Actuarial & Insurance: Q3 saw a $63 million increase in risk management costs due to actuarial adjustments and large loss claims, though not expected to be a recurring trend.
• M&A Execution: Dependency on successful integration and realization of synergies, particularly in the healthcare sector.

Management Tone on the Future:

• Confidence Level: High confidence in the business model, strategic direction, and ability to deliver 2027 growth; outgoing CEO expresses "tremendous confidence" in the incoming leadership and long-term strategy.
• Strategic Clarity: No major strategic shifts expected post-succession; focus remains on price-to-cost discipline, technology integration, and disciplined M&A.
• Integration Progress: Strong sentiment on healthcare integration success, with margins improving faster than expected and volume trends turning positive.
• Hedges: Management refrains from specific 2027 guidance numbers to avoid volatility from macro uncertainties (construction, housing, inflation) but emphasizes structural advantages in pricing power.

Miscellaneous:

• Accounting Changes: Landfill accretion expense moved from operating expenses to depreciation/depletion/accretion for comparability; 2025 actuals restated.
• Capital Spending: Capital spending declined >17% YTD 2026 due to normalized fleet investment and nearing completion of sustainability investment program; Q4 2026 expected to see sequentially higher CapEx.
• Internalization: Internalization rate reached >72% driven by recycling investments and routing optimization, with potential for structural increases.