Waste Management, Inc. (WM) Earnings

Management highlights

### Overall Financial Performance - Second quarter operating EBITDA grew 5.5% YoY, or 9.1% excluding 2025 wildfire cleanup impacts; operating EBITDA margin expanded 40 basis points YoY, overcoming 60 basis points of wildfire comparison headwind and 40 basis points of higher energy surcharge headwind - Free cash flow grew 35% YoY in the quarter; first half 2026 free cash flow grew 56% YoY to $2.02 billion, with operating EBITDA conversion approaching 52% - First half 2026 operating cash flow grew 17% YoY to $3.23 billion, and capital spending was 18% lower YoY as planned sustainability investment projects wind down - SG&A improved 60 basis points to 9.9% of revenue in Q2 2026, returning to below 10% for the first time after the Sericycle acquisition - Leverage finished the quarter at 2.96x, within the 2.5x-3.0x target range ### Strategic and Operational Progress - WM's integrated business model leverages core collection and disposal scale to support growth in higher-return adjacent segments (recycling, renewable energy, healthcare solutions), driving complementary value across the full waste stream - Closed $235 million in solid waste tuck-in acquisitions during the quarter, which strengthen route density, expand the customer base, and enhance the value of the existing disposal network; leverage has returned to the target range following the Sericycle acquisition, so core acquisition activity will increase going forward - Technology and AI investments are delivering sustained cost savings: the Smart Truck platform generates $300 million in annual run-rate EBITDA through optimized routing, lower operating costs, and service upgrades; ongoing development of AI tools, autonomous long-haul vehicles, and remote-operated heavy equipment is expected to support long-term margin expansion - Cross-selling and synergy capture in Healthcare Solutions is progressing ahead of expectations, with the business now fully integrated after a longer-than-planned integration period ### Capital Allocation - Majority of first half 2026 free cash flow was allocated to shareholder returns, including $1 billion in share repurchases and $764 million in dividend payments - Disciplined capital allocation prioritizes investments that leverage WM's existing network, customer base, and operating capabilities; framework prioritizes funding base business maintenance, supporting the dividend, funding strategic growth investments, and returning excess cash to shareholders

Guidance

- Full-year 2026 revenue guidance is narrowed to $26.275 billion to $26.475 billion, a downward revision of approximately 1.5% from prior guidance, driven by softer-than-expected collection/disposal volumes, lower recycling brokerage activity, and delayed RNG plant pipeline connections. Upward revenue from higher-than-expected energy surcharges partially offsets these downward impacts. - Full-year 2026 operating EBITDA and free cash flow guidance are maintained, with management confident in the full-year profitability and cash flow outlook due to strong pricing execution, cost discipline, and an improved Healthcare Solutions outlook. - Full-year 2026 operating EBITDA margin guidance is increased 20 basis points to 31% to 31.2%, reflecting better-than-expected cost productivity and stronger core margin performance in core solid waste. - Full-year SG&A as a percentage of revenue is expected to be around 10%, with Healthcare Solutions SG&A reaching a 15% to 16% run rate by end of 2026. - Full-year 2026 collection and disposal volumes are expected to decline approximately 1% overall, or ~50 basis points excluding 2025 wildfire cleanup impacts, and are expected to be relatively flat in the second half of 2026. Full-year core price for Healthcare Solutions is expected to exit 2026 above 5.5%. - Full-year commodity price outlook for recycling is expected to be slightly higher than the initial $70 per ton forecast, offset by operational impacts from a fire at one Arizona recycling facility. - Management expects leverage to decline further in the second half of 2026, and targets continued annual margin expansion, with 2026 marking the fourth consecutive year of margin growth.

Segment performance

1. Collection and Disposal: This core segment drove strong underlying margin expansion, with price discipline, cost optimization, and business mix improvements supporting overall results. Collection operating costs rose less than 1.7% YoY, even with 4% labor inflation, and Smart Truck platform generates $300 million annual run-rate EBITDA. Excluding 2025 wildfire activity, second quarter collection and disposal volumes declined 0.4% YoY; special waste volumes rose 4.5% YoY, industrial volumes saw modest growth, and residential volumes declined 2.9% YoY (a 200 basis point sequential improvement). 2. Recycling and Renewable Energy: Combined operating EBITDA grew nearly 33% YoY, contributing a 30 basis point uplift to total company margin. Recyclable processing volume increased 12% YoY, and automation projects deliver a sustained 30% improvement in per-ton labor costs vs legacy facilities. Renewable natural gas (RNG) production grew by an additional 1.6 million mmBTU in the quarter. 38 of 39 planned automated recycling facilities are complete, with the final facility coming online in 2027. 3. Healthcare Solutions: Operating EBITDA margin expanded 200 basis points YoY to 19%, with SG&A expense declining 15% YoY (290 basis points as a share of revenue). Cross-selling initiatives have generated $32 million in annual operating EBITDA to date, and the segment is on track to deliver $300 million in total synergies by end of 2027. Core price is expected to exit 2026 above 5.5%, and SG&A as a percentage of revenue is on track to fall to 15-16% (from over 24% at acquisition). 4. Corporate and Other: Higher technology investments and timing of risk management costs created an approximate 40 basis point headwind to overall company margin in the quarter, with sequential performance improvement from Q1 2026 to Q2 2026.

Risks & headwinds

- Soft overall volume trends, with collection and disposal volumes coming in softer than planned entering 2026, driven in part by lost national account volume in the commercial segment, and a lack of expected post-winter volume recovery in the first half of 2026 - RNG production volume is impacted by third-party pipeline connection delays for two completed RNG plants, pushing revenue recognition to 2027 - Higher-than-expected energy and fuel costs create margin headwinds, partially offset by passed-through energy surcharges - Ongoing residential volume churn, driven by competitive intensity in the fragmented residential waste segment, though losses have moderated sequentially - Commodity price volatility for recycled materials, partially mitigated by automation-driven cost reductions and hedging - Forward-looking statements are inherently subject to risks and uncertainties that could cause actual results to differ materially from projections, with additional risks detailed in SEC filings including the most recent 10-K and 10-Qs

Analyst Q&A

• Q: What is the current performance and growth outlook for the Healthcare Solutions business, after a slower-than-expected integration? /

  A: Management confirms the business is now fully integrated, with improved metrics including 5 days of improvement in days sales outstanding, and declining customer credits after peaking in Q4 2025. Customer credits will become a significant tailwind for both top and bottom line results in the second half of 2026. Cross-selling has reached $32 million of annual operating EBITDA, on track to hit the $50 million target by Q1 2027, with total synergies of $300 million still expected by end of 2027. SG&A has fallen from over 24% at acquisition to 18% at end of Q2 2026, and is on track to hit 15-16% by end of 2026. Long-term demographic tailwinds for healthcare waste remain intact, and management maintains its positive medium and long-term outlook for the segment.

• Q: What is the breakdown of drivers behind the downward revision to full-year revenue guidance? /

  A: Half of the downward revenue impact comes from softer-than-expected post-winter volume recovery in collection and disposal, with no clear red flags indicating broad macroeconomic weakness. Half of the remaining impact comes from slower recycling brokerage activity, a mostly pass-through business with minimal impact on EBITDA. The other half comes from delayed RNG pipeline connections for two completed plants, which are expected to come online by end of 2026. In total, lower collection/disposal volume reduces revenue by $250 million, which is partially offset by $175 million in higher-than-expected energy surcharge revenue, for a net negative impact of $75 million on collection/disposal revenue. An additional $75 million negative impact comes from lower recycling brokerage and delayed RNG volumes.

• Q: How does management view current macro volume sentiment, and what is the impact of recent RIN price volatility on hedging strategy for 2027? /

  A: Management reports no noticeable change in customer sentiment, with leading indicators (4.5% volume growth in special waste, 50 basis points of recent growth in industrial roll-off volumes) indicating the economy is stable, not growing rapidly but also not declining. 90% of 2026 RIN volume is already locked in, so 2026 results see no material impact from recent RIN price increases. For 2027, roughly one-third of RIN volume is pre-sold, maintaining the company's standard hedging approach: locking in offtake to reduce risk while retaining exposure to upside price movements. No changes to the long-term hedging strategy were made despite recent RIN price volatility.

• Q: What is the strategic rationale for the recently purchased Florida landfill, and how should we model C&D volume trends in the second half of 2026? /

  A: The Florida landfill acquisition extends WM's already strong competitive disposal advantage in the high-growth Miami market, complementing a previously built rail network that moves waste from South Florida to a long-life Central Florida landfill at competitive transportation costs. For overall collection and disposal volumes, management expects flattish volume in the second half of 2026, bringing full-year 2026 volume to a decline of ~0.8% from prior guidance of +0.4%, with most of the full-year decline driven by lack of post-winter volume recovery in the first half.

• Q: Is recent commercial national account volume loss a sign of rising competition spilling over from residential to commercial? /

  A: Management characterizes the recent volume loss as mostly a one-off dynamic, noting that national account commercial business has grown significantly over the past 3-4 years, with periodic ebbs and flows from competition. Competition from a small number of national peers and price-focused broker networks is not new, and there is no evidence of broader competitive intensification in commercial that would change the long-term outlook.