Transcripts
Waste Management, Inc. (WM) Presents at Goldman Sachs Industrials and Materials Conference Transcript
Waste Management, Inc. (NYSE:WM) Goldman Sachs Industrials and Materials Conference May 10, 2023 2:30 PM ET
Company Participants
Ed Egl – Senior Director, Investor Relations
John Morris – Chief Operating Officer
Conference Call Participants
Jerry Revich – Goldman Sachs
Jerry Revich
Good afternoon. Hi. Thank you, everyone for joining us. I’m Jerry Revich at Goldman Sachs. Really excited to have with us from Waste Management; John Morris, Chief Operating Officer on my right and next to John is; Ed Egl, Senior Director of Investor Relations. Gentlemen, thank you so much for joining us.
John Morris
Thanks for having us.
Ed Egl
Good afternoon.
Question-and-Answer Session
Q – Jerry Revich
So as we look back at Waste Management, over the past five years you folks have compounded earnings at a nice double-digit rate. Got some good combination of pricing, a little bit of volume, M&A, can we talk about the growth algorithm from here you folks have laid out some pretty interesting targets that feel like there could be potential upside given what the base business was already doing before RNG. So can we just talk about the opportunities that you folks might have to be towards the high end of that range and what it would take to get there?
John Morris
Yeah. Thanks Jerry and thanks for the recognition over the last four years. Yeah, we’ve historically said 5% to 6% EBITDA growth a year. And Ed, keep me honest here, but I think the last four or five years it’s been north of 8% or 8.5%.
And I think when you talk about the investments we’re making on the sustainability front on top of that with respect to RNG and what we’re doing in the recycling business you really get to some compelling growth numbers over the next 10, four [ph] years as we go through 2026 and get the full benefit of the investments in automation we’re making on the recycling side, in addition to the investments on the RNG side, I mean, it’s $2-plus billion of investment capital we’re really excited about.
Jerry Revich
And the really interesting part of the journey — I was telling Ed this last time when we caught up, you hear about efficiency gains in a lot of companies. It doesn’t drop down to the bottom line in a lot of companies.
So 20 basis points of margin improvement per year for you folks over the past really 10 years. Can we talk about the efficiency part of that equation? So you folks are automating the customer service experience, we’re talking about automating residential routes? How does that factor into the opportunity side, John?
John Morris
So it’s important. We’ve — kind of three major buckets. But we’ve said publicly, listen, the labor market is not getting any easier, especially for some of our frontline jobs, in our collection business, technicians, recycling facilities et cetera.
And so part of it is really a labor arbitrage issue which is, we said, we think, going back 18 months to two years ago, when we started, we probably got 5,000 to 7,000 roles that we can eliminate the need for which is different than eliminating the role, right?
Because, overtime through attrition, we’re not going to hire those roles back. But the reality is, is part of the reason we’re doing that is the arbitrage piece which — I’ve been in this business my whole career starting out on the back of a truck, way back when driven a truck. A lot of those folks don’t line up the same way to come work in those same roles.
So part of what we’re doing through these investments in technology and automation is to reduce the need for some of those really physically demanding jobs. And that’s really customer experience some of the — and that’s, necessarily a physically demanding job, but a role that’s become harder-and-harder to fill in our recycling business a lot of what we’re doing automate these plants is taking out significant chunks of the manual labor that was traditionally required in these facilities.
And then, when you look at our collection business and more specifically referenced residential, there’s some elements of those roles that are still pretty physically demanding. And with the workforce we have today versus the workforce that’s coming in there’s simply not the desire to govern some of those really physically demanding jobs, and that’s another reason we’re trying to automate our way out of some of those challenges.
Jerry Revich
And in terms of the margin uplift, as that flows through the P&L, John? What’s the benefit that you’re anticipating this year and 2024 from those automation efforts?
John Morris
Yeah. We said from an OpEx standpoint, we thought the first quarter would be about where we ended up in Q1. We were really to see the benefit is in the back half of the year and I think, what was the range Ed for the full year and OpEx?
Ed Egl
Of course for OpEx about 40 basis.
John Morris
Yeah. So, 40 basis points and that’s been an area candidly it’s been a challenge the last hand four years. When you look at supply chain issues, labor issues, overall inflation, we’ve — I think we’ve been staring into the wind, a little bit more in the last 24 months than we had previously.
The good news is, I think what you start to see in Q1, is that, we’ve seen labor moderate. We were high-single digits for some of those frontline roles. And we’ve seen that more normalized down in the five or six percentage range on a year-over-year basis, which is in fact historic-normals, but it’s a heck of a lot better than it was.
We’re seeing our supply chain loosen up and more specifically, I said this on the call a few weeks ago. If you go back three years, coming out of post-pandemic, post-ADS and you look at the challenges we’re probably 2,000-plus trucks behind where we would have otherwise been.
The good news is, is that, last year we delivered less than 100 trucks in Q1, this year almost 400 and we see that improving. And that is really — when you talk about OpEx improvement, EBITDA improvement, maintenance and repairs and labors are two really big buckets where we feel a lot better this year than we did last year.
Jerry Revich
And John, Ed another part of the automation plan is around daily route planning. Can you talk about where we stand and the timing of when you expect to roll that out across the enterprise?
John Morris
So we’ve always had in-house routing engineers, right? But the challenge has been how in a business and lines of business within the collection business particularly the industrial roll-offline, which is the most dynamic by far. How do you get the most efficiency out of that line of business and part of it is being able to real-time route, right?
And so, we do a good job of engineering the routes and setting them out in the morning, but things change, right? And our ability to change with the dynamics of that routing is really what we started to deploy and you’ve heard us talk about next-day optimization which ultimately becomes intraday optimization.
And that’s — so the good news is we’re in — I think we’re in about 45 sites for this pilot. The results have been good so far that’s step one. That’s next-day optimization and then ultimately we want to get to intraday optimization.
So, we can react real time. The other technology we’ve laid on top of that, as I send you out with a perfect route in the morning Jerry and you get behind the wheel and you’re ready to roll. There’s construction there’s an accident there’s weather there’s whatever. We’ve also laid — these are my words.
We laid another technology. We’ve just started rolling out in the last handful of quarters which is basically real-time navigation on top of that the engineered route. So I think about it as waste for garbage trucks, right? So I get out I got my 10 stops as a roll-off driver in the morning and they’re all laid out perfectly and then everything else happens. And then these folks will have the ability to get real-time navigation to get through that route in the most efficient way and we’re just in the early innings of that. So there’s efficiency benefits there, there’s safety benefits there. I mean, so we’re excited about.
Jerry Revich
Very interesting. And the next day routing so 45 sites out of how many waste management sites that will be?
John Morris
Sites is not important. I think we rerun about 4,000 roll-off routes and that — and we’re starting it for obvious — it’s the most dynamic line of business within the collection business. When you think about our residential line of business it’s much, much more static and commercial is a little more dynamic but not quite as roll-off. So we’re starting with where the biggest opportunity and the biggest challenge is in terms of getting the technology rolled out.
Jerry Revich
And so there are 4,000 roll-off routes and this is on how many of those routes is an issue there?
John Morris
I want to tell you, I’m probably going to give you the wrong number. I want to say, it’s probably running about 500 or 600 routes right now.
Jerry Revich
So it’s a pretty big truck.
John Morris
Yeah. Yeah.
Jerry Revich
And what are you seeing John in terms of the initial efficiency gains on those routes, where you’re doing the routes?
John Morris
Well, the real efficiency gain is going to be on intra-day and that’s why it delineated between next day and intraday, but we’re seeing a few single-digit percentage points on next-day optimization, which is frankly what we were looking for. And again, it’s not on the whole sample, but the early indications are that we’re going to see an initial uplift with next-day optimization, but the real benefit should come when we get to intraday.
Jerry Revich
And how much of recovered in that be?
John Morris
I would say, it’s in the middle to high single digits.
Jerry Revich
And that’s essentially, if I think about that as a number of stops feasible for driver. Is that — ?
John Morris
We’re going to be — we’re either going to be more efficient with the same assets or we’re going to do more work with the same assets. So we’re going to either way, I think of it from an asset utilization standpoint and creating capacity, if you can get 5%, 6%, 7%, 8% pick a number I mean you think about it all the way through from an operating standpoint from a capital standpoint that’s — there’s efficiencies across all those considerations.
Jerry Revich
Waste for sanitation sounds pretty good.
John Morris
Yeah, it’s my word. It’s not a waste product. It’s just the way I think of it.
Jerry Revich
Can we talk about capital deployment? So the M&A environment today and the pipeline versus stock buyback versus dividend growth how do you folks consider the moving pieces?
John Morris
Okay. We’ve been — we’ve always looked at it from how we’re going to deploy capital and we talk about dividend being paramount payout ratio in that 45% to 50%. And then next, we’ve looked at M&A and then share buyback. And that’s been pretty consistent and we’ll continue to do. I think the one thing that’s different over the last handful of years is really the $2 plus billion we’re allocating to the sustainability investments over $1 billion in the renewable energy side, and we’ll get up to 28 million MMBtu all in when we get to build out all this incremental capacity.
And then what we’ve done on the recycling side. We’ve talked a lot for some who probably saw the Investor Day that Tara and team put together for April — last April 5. I thought did a lot to kind of clarify a lot of questions we continue to get there. But that’s probably the one, if you want to call it a deviation is the fact that we’ve — and by the way we’ve said, conservatively the payback on these RNG plants is about three years and it’s about five to six years on the recycling plants compared to — you were doing M&A even when you look at it from a post synergy standpoint at 7, 8, 9 times, pick a number these make a lot of sense to us.
I think that doesn’t mean, we’re not going to do obviously M&A. I think we did a little less than $400 million last year continue to keep our eye and try to be disciplined in what we do there. But I think some of the things we talked about earlier around cost pressure supply chain issues labor issues et cetera. We’ve seen a little bit of additional buzz, if you will about folks, who are probably thinking about if they want to recapitalize their fleet can they get the labor? Can they fight through the supply chain issues or is now the opportune time to sell for them.
Jerry Revich
And for under $100 million deals, it’s pretty straightforward. What about for larger deals that would trigger that regulatory review, is that less interest for you folks given what we’ve seen.
John Morris
I smile, because I don’t know, if it’s of less interest, but I got a full dose of that when we did the ADS deal. So we got a chance most recently to go through that process. No, I think we’re eyes wide open. I don’t think, it deters us, I just think it’s another consideration, you need to be prepared for if you’re going to fall into that HSR category.
Jerry Revich
Yeah. Yeah. They’re making that process not so enjoyable. On the landfill gas side, what’s interesting is part of your truck conversion plan is going to soak up a big chunk of the gas that you’re set to come online. So at least mathematically it feels like you could absorb 15 million MMBtu just within your fleet. Is that right? Is that consistent with your use plan?
John Morris
I’ll start, and then I’ll keep my math accurate here. So right now today 75% of our fleet on the street is running on CNG about 35% of that 40% of that is running off RNG and a chunk of that is ours. The reason, I bring it up is we have — as we bring these plants on we have the ability to close the loop on a lot of our fleet. And we’re not done at 75%. We think we can probably get up into the 90-plus percent range in terms of CNG. And that’s not because we wouldn’t go further. There’s lot of benefits to it notwithstanding the RNG benefit most recently but there’s just availability of gas becomes a challenge in some areas.
So — but by and large, we think we’ll be virtually all CNG here in the next handful of years and we will have the ability to fuel theoretically all of our trucks with our own RNG, and Ed will keep me honest here on how much additional gas we have potentially to sell after. If we were to put it all in our fleet, which we’re not committing to do that, because there’s other options fixed price contracts non-transportation-related sale of that gas.
Ed Egl
I think that’s what John’s point is a good one here right? We have a lot of options on here. We want to keep them the flexibility of what we’re doing. So yes, we could fuel our entire fleet by 2026 with our own RNG but there are other considerations. You have a low fuel carbon standard — you have low carbon fuel standard, sorry, in different states that give us credit for using lower intensive carbon score fuel like dairy and swine barn. So we can continue to do that and reap the benefits of it.
And then, to mitigate some of the fluctuations in the price volatility that you could potentially see, we can enter into some contracts with the voluntary market large university systems or industrial users that want to reduce their carbon footprint. So they’ll buy the gas from us and it’s not as volatile market as kind of depending on the RIN sales.
Jerry Revich
And that’s a really interesting point about your current LCFS use. Can you talk about that? Out of what proportion of the gas that you’re using are you getting benefits from that are not related to your own gas.
Ed Egl
It’s hard to say, right? I mean mostly it’s in California right now. Oregon has some of it. I think in Washington, it will populate across the US eventually. It’s really in those specific markets where it’s available that we’re doing it. And obviously, California is a pretty big market for us. So we get a lot of that there.
Jerry Revich
Got it. Okay. Super. And then in terms of the opportunity to develop additional landfill gas assets beyond this initial 2026 plan. Can you talk about how you folks are thinking about the reserve life that we could ultimately be looking at? And what could the development time line cadence, be like for the rest of the portfolio? In other words, are we setting up teams that can do three plants per year going forward on a run rate basis? How should we think about it?
John Morris
So thankfully our group got way out in front of this in terms of — we made this investment to get up to the 28 million MMBtus with the plants we’ve already talked about. So supply chain hasn’t really been an issue for us. In fact, there hasn’t been an issue. But with any kind of regulated facility including an RNG plant some of what you have to kind of fight your way through is permitting and zoning in connection lines and all those kind of things.
But we feel good about where we told everybody we would be in terms of plants coming online on time by 2026. And as you can imagine, there’ll be some small puts and takes that none of us could have thought about at the time, but I think by and large we feel good about where we’re going to be at the end of 2026. And I think at the end — by the time we build all these plants, we get up to about 65% of that gas being beneficially reused, which you asked the question.
There’s still another opportunity for that 35%. We look at it as an opportunity. I’m not sure we put a pen to paper here in terms of exactly where that — where we’re going to try to monetize that. But as I’ve said, we’ve got a lot of optionality here. I think for us from a — certainly from a balance sheet standpoint, from a technology standpoint, infrastructure standpoint, team standpoint, we feel very good about doing this in-house. And we’ve had some earlier sort of one-on-one meetings.
And one of the things I reminded everybody is RNG is a different technology to manage the gas that we’ve been managing out of these landfills for decades. We’ve got 60-something landfill gas to electric plants. I know that leads into the whole e-RIN discussion. I wasn’t going there. I’m trying to jump you there — jump the question.
But the point is that when we look at managing the environmental controls that come with a landfill, liquid and gases are two of those things we’ve been doing, I think exceptionally well for years. This is as I’ve said, the gas comes out of the landfill it makes the right and goes to a gen cent. We make electrons or it may go left and end up being molecules we put back on one of our clean field trucks.
Jerry Revich
Sounds good. Let’s talk about recycling we can circle up on the e-RINs. But on recycling, John, really interesting implications from the program that you folks have to improve productivity. So essentially excluding expansion investments we’re talking about $140 million of incremental EBITDA, which essentially means that the trough of the cycle recycling line of business is going to be delivering north of 20% margins, pretty interesting dynamic.
John Morris
The challenge for — anybody who’s been following the industry from some time is recycling — when the commodity prices are good recycling was great and the inverse was also true. And we rode up and down on those commodity fluctuations for some time. And then, I guess it was probably about five or six years ago, we really said listen in order for recycling to be sustainable, it’s got to be economically sustainable. How do we do that?
And at the time anybody, who was in the recycling business was taking all the operating risk the capital risk and frankly the commodity risk. And that was clearly an imbalance we weren’t happy with. Again, it was really good when it was good, and it was really bad when it wasn’t. So we set out to say how are we going to make recycling a resilient business. And we said this we have to rebalance the relationship between us and the customer in terms of risk/reward.
And if you’ve been to a recycling facility, it’s a manufacturing facility. Heterogeneous material goes in, homogeneous material goes out. And there’s got to be end markets for it. I think that’s another reason why we feel good about recycling is I think, receptivity and the demand by the customer end is continuing to increase. But the position we took is we, want to be paid a fair margin and a fair return to process the material, so we’re manufacturing operation. And then from there we can decide what the right relationship is between us and the customer in terms of kind of what’s left over. And I think what you’ve been seeing for the last handful of years and certainly, the last handful of quarters is as we’ve invested in these facilities, we’ve taken a labor intensity down by as much as 30%.
Operating expense is down by anywhere 15% to 20%. And even in a $54 market, which is what Q1 was for us those – recycling performed well and those automated plants performed much better than that. So we feel really good about those investments. And that we’re going as fast as we can there but it takes some time to rehab one of those facilities.
Jerry Revich
And you obviously get the most bang for your buck out of rolling out at your biggest facilities first. Is there another layer after this $140 million benefit? Is there a next layer that you folks would evaluate in terms of smaller plants that are feasible to move forward?
John Morris
You bring up an important number there, because the $140 million is the piece of the EBITDA that’s unrelated to anything that has to do with commodity price, right? That was really throughput of the plants that improves with this technology and simply the labor efficiency. I think the overall number was over 220 million or 240 million, so I’m sorry, finish the last part of that question.
Jerry Revich
Yes. No exactly. So my point as you’re rolling this out at your largest facilities where you get the maximum return – and I’m wondering as we think about okay, are there smaller facilities where the payback is maybe seven years and not five years, what’s that next layer of opportunity set look like.
John Morris
You make a great – a good point. We started our first plant that we called the MRF of the future then it’s just the MRF the present now. We had the – it was a little bit unique. We had two facilities in town and we had some real estate considerations that allowed us to consolidate it. So that’s one of the reasons we went there first.
But to your point we’re obviously prioritizing markets where we’ve got an existing recycling footprint. We’ve got existing business. We still see the market demand and the need for the services. So by the time we get through automating, so the number of MRFs we have is a little bit misleading. What we’re really talking about is optimizing our single-stream MRFs. And by the time we’re all done we will put almost all of our materials – yes, through an automated – now in some places we might use a third-party facility. But by and large we’re going to have the capacity to process or a single-stream material through a version of an optimized or automated MRF when we’re done.
Jerry Revich
And your recycling internalization rate, what does that look like? So what proportion of recycle that you like goes through your facility?
John Morris
Oh boy. I know our overall internalization rate which is a different answer different questions. About 67% 68%.
Ed Egl
I think it was about the same range.
John Morris
Yes I was going to say it’s probably in the same range.
Ed Egl
Right around the same.
Jerry Revich
And it’s interesting right because you folks make more per ton when something is recycled than when it’s put in a landfill, as we think about recycling rates in the US moving up to what extent is it a strategic priority for you folks to acquire existing recycling plants or set up greenfield facilities? How big of a priority is that.
John Morris
Well, that’s a priority because part of that capital allocation for recycling is for new markets, right? Somebody would say well, why are you going to go to market when recycling prices are depressed. Well, it goes back to where we started this conversation, which is we think the automated, the investments we’re making in automated technology allow us to be profitable at the right level in any commodity market.
So now all of a sudden you look at some of these markets, we’re not in through a different lens. It’s not hey the commodity price is low, we should wait. It’s we have a model that’s differentiated and that’s a reason for us to continue to invest in some of these new markets. And I think it’s eight or 10 new markets I think 12 – sorry 12 markets that we – that are new as part of that investment. So it’s not just the existing markets.
Ed Egl
If the demand is there because you’re seeing that population growth move. Where you’re seeing California residents move to Texas, people from New York moving to Florida. They get there and there’s places where they don’t have recycling and they’re used to have a recycling. So that demand is there for them to start-up of recycling service and we’re want to fit those needs for those customers.
Jerry Revich
Interesting, so you’re adding new routes in those areas as well, Ed?
Ed Egl
We can. Yes, right. So we don’t have recycling services today, yes, we’d have to.
Jerry Revich
That’s really interesting. How big is that opportunity? Is that starting to move the needle for you folks?
John Morris
I don’t know that it’s moving the needle Jerry. I mean if you look at where the population density is, I mean for the most part there’s recycling assets in place. But there are a handful of markets where we’re going into where they simply – they used to offer recycling services either collection and processing but because of some of the challenges that part of the industry has seen, they’re not offering those services anymore. Now we’re going back in again with a differentiated lower-cost model, where we can offer those services in a $54 market and still get a good return and that changes the conversation.
Jerry Revich
Very interesting. Can we shift gears and talk about pricing. So you folks had really good sequential improvement in margins ahead of normal seasonality but it was surprising to see the yield slower. I know there’s a seasonal element to it. Can you just expand on that point? Because I think the way seasonality impacts your yield is just different compared to other companies. Can we just expand on that part of your reporting and what you expect the yield to look like over the next couple of quarters.
John Morris
Sure. I would tell you that first and foremost in terms of our pricing strategy, nothing has changed there. In fact, I would point to two lines of business or three, our post collection and landfill and transfer lines of business have continued to improve quarter-over-quarter really over the last three years. And then our residential line of business, I mean we’ve – we’re not intentionally losing the volume but that’s a line of business, that’s been really pressured by inflation in particular, labor because it’s a more labor-intensive line of business than the other two. So in Q1, I’ll be close I think we traded off about 3% volume and I think the revenue was up 52 or 4 million for the quarter. So we’re going to continue to do that until that line of business competes from an investment return standpoint with all the other ones.
And then I think on the landfill side, I mean listen let’s face it. We talk — in particular on the call always talking about the network. It’s not just the landfill. The landfills they’re becoming fewer and further between, right, which means the ability to access those sites is going to be more reliant on a really resilient robust transportation network. We do a ton of business with the city in New York here for the last 25 years. And if you live in the city here you know that it all leaves by boat or by rail and it goes some place and it takes a long time and a lot of miles to get there.
The transfer piece and the strength of the network is becoming more and more important especially in a major market like New York or Philadelphia or South Florida. And the cost of that and the returns that are required to be able to support and continue to expand the network like that are part of the reason you’re seeing the focus on post-collection pricing not just the landfill gate, but also the transfer station which is a remote gate for those landfills.
Ed Egl
One thing I’d add to that if you remember last year we increased one of our fees for our customers. So we anniversary that in the first quarter. So it looks like optically we still have that fee on the customers’ bills, but there’s no incremental bump up from what we saw last year. So it’s kind of flat on that piece of it. The other thing to say as John mentioned we continue to raise prices like we have all the time. And if you look at it our base business continues to grow. So as a percentage of revenue if our base continuing to grow and you have the same dollars, it looks like it might be declining and we’re not doing anything differently. We continue to raise prices and focus on the customer lifetime value.
Jerry Revich
And your price/cost is expanding over the course of this year?
Ed Egl
We expect it to, right? And now in the first quarter it’s a little bit different. We do expect inflationary cost pressures to come down as we go through the year. It’s a little bit more elevated in the first quarter than we probably expected. So you didn’t get that spread that we would have liked to see. But over the time for this year, we expect that to happen.
Jerry Revich
And John, can we go back to your point on post collection. So really good pricing inflection that we’re seeing. Ed and I spoke about a chunk of that is going to be CPI linked. So there should be some good momentum for post collection from here. Do you think we’re setting up for a period of structurally better pricing for you folks in the industry for post collection as a whole versus collection which I think would be better than what we’ve seen over the past couple of years.
John Morris
Yeah. I kind of think about it in terms of lines of business Jerry. If you look historically you got commercial industrial business which is more where the open market lies is where we performed better. I talked about residential and the reasons why we’re continuing to focus there. I think on the post-collection side, listen a couple of things are absolutely true is that the value of landfill space is growing the ability to access it is still — is becoming more challenging to some of the examples I gave earlier. And I also think if you look historically, we were 1.5% to 2% kind of yield in the post-collection bucket. And now we’re obviously moving those numbers in a meaningful way. And by the way the cost to build own operate those facilities and continue to develop them as they’re getting any cheaper also. So when I think about it, it’s the core price and the yield numbers are important. It’s really about the spread between what am I seeing in the middle of the P&L versus the top line and that’s really where we’re trying to stay focused.
Jerry Revich
And in terms of free cash flow conversion standpoint. So we’ve got these big profitable investments rolling through now that are going to be coming in better margins in R&D, better margins and recycling. Once we’re apples-to-apples where we don’t have any more new CapEx and the free cash flows run rate standpoint 2027. What should we think about free cash flow conversion looking like for you folks? Are we thinking of new highs in EBITDA to free cash flow conversion following these investments?
John Morris
Ed can add some color here. But I would tell you that just because we’ve talked about getting up to 28 million MMBtus and RNG in these plants that we’re going to automate in a handful of markets that’s what we’ve identified. We still think there’s opportunity above and beyond that, right? So we’re talking about it it’s hard to believe that we’re almost halfway through 2023 already. And these RNG plans are all going to be online by first half of 2026 or certainly by the end of 2026 and the recycling facilities will all be complete in the same timeline, but that’s not to suggest that we’re done with the opportunity there. That’s really what we’ve outlined. And again, we still have — that will get us to 65% beneficial reuse of all that gas. We still got one-third of it left give or take that we have some options a lot of optionality in terms of what we want to do with it.
Ed Egl
To answer your question there on the conversion, yeah we should see that continue to grow, right? Mid-40% range right now we’re looking to get to closer to the upper 40s low 50% as we get closer to having those with no capital while expanding have all the free cash flow generation. All else being equal, right? To John’s point, we could have other investments that we’re doing. But yes, we’re looking to see that continue to grow.
Jerry Revich
Very nice. Let me pause and see if anybody has any questions. So John, let me take you up on your offer to talk to your incident?
John Morris
I know. I shouldn’t have brought it up.
Jerry Revich
So there was an article suggesting that EPA might delink e-RINs from conventional RINs. Can you talk about implications for you folks sounds like it could be a net positive because I would imagine the D3 requirements conventionally move up and then there is a push towards electrification broadly. So but would love to hear your take on how you think that plays?
John Morris
Sure. So listen June is an important month in terms of what’s going to happen there with the set role in the RVO and those kind of things. I personally it is going to take longer than June, but that’s just the federal government.
The one interesting difference between the traditional RIN that we talk about today and the e-RIN is the fact that right now the way it’s at least drafted is the benefit of the e-RIN goes back to the manufacturer right which is different. Now, we don’t know where that’s going to finish.
The good news for us is that if it happened tomorrow and there was a pathway for e-RINs, we’ve got 60-plus facilities that are operating today where we take the same kind of gas out of the same kind of landfill and make electrons out of it today. And so that would be no capital investment, no change really in the pathway. We’d still be putting those electrons into the grid or wherever the customer was but we have the benefit of the e-RIN.
So, we look at it first and foremost if it becomes a thing we’ve got some immediate upside without a lot of capital. The broader question around electrification there’s a lot of questions we get asked because we’re the largest heavy-duty fleet in North America, the largest CNG fleet in North America what happens if.
And I would answer it in a few ways. One our fleet strategy has always allowed us some pliability and I think going from traditional diesel to CNG as an example of that, right? We were no CNG 12 years ago very little and now we’re 75% of what’s routed and climbing. And if electrification was to come to a theater near us soon, we’d have the ability to do that.
In fact we — last week was — I’m not sure folks there was a trade show last week in New Orleans and we partnered with Autocar and [indiscernible] and actually have a demonstration unit on its way to Seattle, Kirkland, Washington that is a fully electric truck chassis and body.
So, there’s technology out there. There’s a bunch of pilots we’re doing. We’re staying close to all those technology folks to see who’s going to get there when. I personally think battery technology if you look in a rearview mirror what’s happening with passenger vehicles, light-duty vehicles that the technology is advancing such at some point they’re going to solve for I think our industry which is the hardest one because it’s not just driving for A to B, it’s the parasitic load and the duty cycle of the vehicle and all that.
If you make that jump the question to me on electrification is really not that, it’s the infrastructure question. And if you look in particular we brought up LCFS and we’re talking about California and carbon and all the things that are going on out there, California is struggling today. They’ve got their own challenges on keeping the lights on so to speak and yet we have an electrified all the passenger vehicles yet let alone all the other fleets.
So, I think electrification from the transportation space is going to matriculate through light-duty, medium-duty, et cetera. I think the bigger question is going to be infrastructure and what does that look like in order to electrify, whether it’s a passenger medium-duty or heavy-duty fleet?
Ed Egl
One thing I’d like to bring up going from the e-RINs to regular RINs is the way we’re going about it, the investments that we’re making we retain the optionality. So, we can take the best use of that dollar invest it somewhere. And if e-RINs become a thing for us we have the optionality to do that.
If we — if it doesn’t happen and not traditional RINs that we provide, we can invest in that dollar. We’ve kept that optionality because of the way we’re going about investing in this business.
Jerry Revich
And earlier on the stage we had comments talking about 15-liter natural gas engines coming to market over the next couple of years. Is that something that is going to be supportive of your strategy, or does it not matter is I think you folks are what using the nine or 12.
John Morris
9 or 12.
Jerry Revich
9 or 12.
John Morris
Yes and that really matches up pretty well with all our duty cycles. We obviously it’s more efficient to put a 9-liter engine in a vehicle where you can and some places where the weight restrictions are in the 50s versus the 70s that makes some sense. But right now we’ve got the ability either through 9-liter or 12 liters satisfy really just about every one of our duty cycles.
Jerry Revich
Good. In terms of last question let’s wrap-up on PFAS. So, potentially an incremental cost the landfills, what’s your level of confidence that the industry would pass that through immediately kind of like we saw with inflation–
John Morris
I thought we’re going to get out of here rather than PFAS question. Jerry, I’m kidding. Listen I think we’ve been following everything that’s going on from a legislative perspective from a technology perspective. I think the good news is the EPA still identifies subtitle B landfills as a very real solution for a lot of those PFAS containing waste streams.
So, yes, could there be some cost incurred in the short-term, yes. But we — I feel as though we’ve got technology partners within the wastewater treatment space within our landfills that we’re going to be a solution. And in fact some of our sites now that have closed loop leachate systems if you will we’re taking DoD material now from PFAS contaminated sites.
Yes, but that’s in those are in a limited number of sites where there’s no — there’s nothing that leaves the site. So, it’s one of our subtitle B sites out on the West Coast and some and a handful of other sites that have closed leachate system because the real risk is that PFAS comes in, right?
We’re a passive receiver it’s if the leachate goes out where does it go and how is it treated from there versus the POTW industrial wastewater and there’s this whole thing about the four parts per trillion about drinking water. I’ve done a little homework and been educated on that.
That’s — it’s like a drop in 2014 Olympic swimming pools is kind of what the drinking water limit is there. But the risk had sounded sarcastic. There’s still some work that needs to be done some wood that needs to be chopped here on the PFAS front. But I think ultimately the industry and our landfills become a solution provider.
Jerry Revich
Super, great. Well, please join me in thanking John and Ed for coming out for conference. Gentlemen thank you very much.
John Morris
Thanks.
Ed Egl
Thank you.