Devina Rankin: Margins could be backward in the first quarter of the year. The pressure from the recycling line of business is the most acute. And while drop in commodity prices is typically something that we see benefit our margin in that part of the business, because of the pass-through elements of some of it. We have seen some pressure. So we are predicting some flatness, I would say, in the first quarter, with expanding margin in the second quarter, particularly on the cost side of the business and starting to see the pricing parts of the business really contribute as they did in the second half of 2022, as we anniversary some of those impacts from the recycling line of business I mentioned. So first half, second half, I would say you’ll see more muted margin expansion in the first half, stronger margin expansion in the back half.
That being said, I wouldn’t expect the minus 100, plus 100 that we saw in 2022 because we’ve overcome so many of the operating cost headwinds that we were experiencing this year and really starting to see some strong momentum there.
Tyler Brown: Okay. Perfect. That’s extremely helpful. And my last one, just real quick, you kind of went through quite a bit on the free cash flow puts and takes. But can you kind of go back over what the expectation is year-over-year for cash taxes, cash interest and then maybe working capital? Just trying to help build that bridge.
Devina Rankin: Sure. So EBITDA growth at the midpoint is $390 million, and so that will be the driver of free cash flow growth, cash flow from operations growth next year. Unfortunately, with this interest rate environment, we’re going to have to give some of that back because our cost of debt is going up. As you can see, when you look at our fourth quarter results, our weighted average borrowing rate in the fourth quarter actually went up 80 basis points. And so that was an increase of $26 million in the quarter. We were virtually flat all year long in advance of Q4. And when we take that Q4 impact and extrapolate it to 2023, that’s what’s going to be driving our interest costs higher. So that in and of itself is a little over $100 million of impact.
And then we do expect our debt balances to increase in the year ahead. Our debt balances are going to increase because we are seeing such strong growth, and we are going to be investing in all elements of capital allocation with that strong balance sheet. So not pulling back any on our allocation of cash to share buyback in the year ahead, is our current plan. We may moderate it some, but we’ll give you more color on that over the course of the year. So with the higher debt balances and the higher interest cost that really is all of the $175 million to $215 million that I mentioned in interest and taxes. Taxes are actually going to be essentially flat. So while we would have expected some moderation in that, because of the one-time payment that I mentioned of $100 million, we’re really seeing that offset by two things: one, higher pretax income; and the other being the expiration of a piece of bonus depreciation and the asset mix that we’re putting in place.
So those are the interest and tax pieces. The $80 million headwind I mentioned on working capital, we had an $88 million contribution to working capital in 2022. So we’re essentially saying that, we think we might give some of that back. Some of that is a moderation in DSO, just because of the recessionary environment that we’re predicting. But a large contributor is timing and amount of incentive compensation payments.
Tyler Brown: Very detailed as always. Thank you so much.
Devina Rankin: You’re welcome.
Operator: Thank you. One moment for question’s. Our next question comes from Noah Kaye with Oppenheimer. You may proceed.
Noah Kaye: Good morning. Thanks. D&A stepped up in 4Q. Can you first provide a little color on that and then give us what should be D&A for 2023?
Devina Rankin: Sure. So the color there is really inflation in our landfill costs. And it’s both from normal inflationary cost pressures, as well as the regulatory environment, that’s driving some of our costs for closure, post-closure higher. So the charge that we took in the fourth quarter relates predominantly to our closed site part of the portfolio, though some of it is also representative of changes we’re seeing in management of the active landfills, too. In terms of next year’s DD&A, we’re not predicting another step change from this current level, but we are expecting DD&A levels to reflect better delivery of trucks in the year ahead. So you’ll see some increased depreciation in the first half of the year rather than waiting to see all of that impact in Q4.
Noah Kaye: Okay. But we could again be above that $2 billion number for 2023. So net-net D&A would step up year-over-year?
Devina Rankin: Net-net G&A is going to be moderately higher just with the capital expenditure deliveries, but it’s not going to be another step change from this level.
Noah Kaye: Yeah. Okay. And then just on pricing, I guess, Jim, listening to your comments around some of the softening in the commercial sector. How do we think about the cadence of price growth expectations? It seems hard to sustain double digits in C&I as we go through the balance of the year. There is some math on that, of course. But how do we think about pricing? And what elements of the business may see the greatest sequential price declines on a cadence basis?
Jim Fish: Well, I think we think about it — I mean, we’re thinking about pricing because there are — there’s a two-fold exercise here. One is combating cost increases or inflation, which was why the last 18 months have been so challenging, because we really felt like it was almost all, in fact, in many cases, all of it was going towards combating inflation. And then a second piece is adding a few margin points for us. So as we look at this through our price group, particularly for commercial since that’s where your question was, we think that pricing will moderate a bit, because inflation is moderating significantly. And that ends up being a good thing for us. If you look at collection and disposal yield for last year versus our guidance for this year, last year was $6.7 million this year guidance is 5.5%.
So there is some moderation in yield there. But significantly, we’re projecting at least a significantly different cost picture. So we think the price starts to contribute to margin again, whereas, it hasn’t for the last probably three years.
John Morris: I think the only one I would make there, Jim, is the residential line of business, specific if you look at our volume loss there, clearly, we continue to make deliberate decisions. We mentioned some of the franchises that we’ve parted ways with. And even if you look at the 4.5% or 4.7% negative volume, our revenue was still up over $50 million for the quarter in residential. And as we’ve said, we’re going to continue down that path until we get acceptable returns and margins for that line of business. And so we’re happy with that progress. We don’t like intentionally shedding that business but under these conditions, like Jim said, the inflation is what we’re combating and it’s been most acute in residential, partly due to the labor intensity there.
Jim Fish: Yeah, I think maybe one place where it might not moderate as much is on the landfill side. I mean, we have a differentiated product there and so not that we don’t have a differentiated product on the collection side, but landfill in particular, the yield was 6.2% MSW last year. I think that’s probably the highest annual yield for MSW maybe in our history. And I don’t expect that to come back to at a lot.
Noah Kaye: Very helpful. Thank you.
Operator: Thank you. Our next question comes from Bryan Burgmeier with Citi. You may proceed.
Bryan Burgmeier: Good morning and thanks for taking the question. I understand free cash flow will get near-term. But do you think WM can emerge from this investment period with structurally higher free cash flow conversion from EBITDA than you had in 2021 and before, it seems like these investments will be highly cash generative once ramped and can potentially exceed where you were before the investment period.
