Waste Management, Inc. (WM) Earnings Call Transcript & Summary

Fireside chat, open dialogue. I'm going to ask a few questions and I'll turn it to the audience maybe halfway through, see if anyone has any questions. So just to kick it off, Devina, thank you for joining us, by the way.

So glad to be here.

And just to start it off, I think it would be helpful for us to take a step back maybe to understand how Waste Management became the company it is today. So we'll get into the conversation about the waste industry and some of the dynamics at play. But Waste Management has been around for decades, yet it feels like over the last few years it kind of underwent a transformation with you and Jim at the top. Just to put some numbers around that, in 2019, your revenue finished at $15 billion. That's about 10% above where it was 4 or 5 years ago, yet your EBITDA is up 30%, your EPS has nearly doubled. So maybe you can walk through how Waste Management has really outperformed itself through this waste recovery we've seen over the last few years.

So I really can't think of a better way to start the conversation because in so many ways that tells our story for us and I think there's more room for us to grow. I think while Jim and I would like to say that we've had an impact and leadership certainly does help us to define accountability and discipline and focus on collaboration and communication and all of those things, I think, fundamentally, it's the assets that we have the luxury of being given in order to approach the marketplace and the people of Waste Management who are driving this engine. And there's so much more that we can do from here. I think you've pointed to the revenue growth being relatively muted when you compare it to the EPS and the EBITDA growth. And I think, in so many ways, that's the how we're growing, so where some of that revenue growth is coming from. And we've talked about landfill pricing and landfill volumes both being things that really have shown through in terms of top line growth the last several years, and we expect that to continue because our landfills are so well positioned. And we talk about population growth and urbanization as trends. We don't see anything telling us that those trends slow down or revert. So that certainly will be a factor. This team is committed to continuous improvement. We've talked about continuous improvement and differentiation truly being kind of the 2 things that should be central to how we execute. And if you think about a continuous improvement mindset in a mature industry with assets that are well placed, that means we're just never going to settle that we've achieved a level of execution that we can't continue to see some growth and opportunity for better leverage. And then on the differentiation side, I think Waste Management really has fundamentally changed the conversation about sustainability and I think that there's room there as well. I think sustainability for us isn't a new thing or kind of a flavor of the month that's happening because of Larry Fink's letter. It's the way we do business, and that has been the way we do business. I've been with the company for 17 years and sustainability is just at the center of what we do and how we execute with the investment in recycling, with investments that we've made in looking for next-generation technologies. I think the piece of the sustainability message for Waste Management that has been underappreciated in years past that we're really focusing on now is people. So we talk a lot at Waste Management about people and planet. And the focus on putting our people first is another piece of that sustainability message that really does fuel that earnings growth.

That's helpful. You were talking about how the revenue growth maybe looks muted compared to the EBITDA and the EPS growth. What's interesting is, I think, on the volume side, Waste Management is expecting and guiding to 1.5% volume growth in 2020. This is actually above some of your peers. We have some of the peers coming here tomorrow, just a quick shout-out. And what's interesting is that this 1.5% volume growth, Waste Management actually volumes inflected a little late. It was in 2016. And now all of a sudden your volumes are actually growing faster than your peers. That's kind of rare to see such a big company, the leader by a wide margin, actually growing faster than its peers. So maybe you could touch on that dynamic? Is it the geographical mix? Is it some initiatives of focusing in certain areas where you think you can capture more growth?

I think there are 3 things. First is that well-placed asset network. So in the landfill part of the business, I think having assets that are close to city centers where waste is created is fundamental. And while our competitors certainly have well-placed assets as well, I think there are just some fundamental differences in terms of where some of those assets are, and therefore, the type of growth that is organically being created there. I think we'll continue to see strength because of those well-placed assets. The second, I think, is more of that differentiation focus that I mentioned. And we're particularly seeing that in the national accounts part of the business. And that's taking hold in a way that it really has changed the conversation on how national accounts business can be viewed. Our national accounts partners are looking for a service provider who is as committed to sustainability as they are. And so with data and reporting that we're able to deliver to our customers, we've actually seen our customers migrate to Waste Management and do so in a way that allows us to price that business more appropriately and see what would have been considered nonstandard price increases in that part of the Waste Management customer profile. I think the third one really comes down to commercial collection and what we are doing to know our customers better, not just than our competitors, but better than we did yesterday. So what can we do in the way of using technology that we have on all of our routed vehicles to understand our customer needs and how those customer needs are evolving. And that means that we're seeing service increase opportunities because our customers' cans are overflowing. And so tomorrow, they might need to be serviced twice a week instead of the onetime a week that they've been accustomed to or they might have an opportunity to have a larger container. And all of that comes with a different volume model. So I think those are the types of things that are fueling the volume and none of them necessarily -- I think the leadership position in the industry is the catalyst to the well-placed asset network, but I think our commitment to sustainability and knowing our customer is what's fueling everything else. And I think that, that will be sustainable.

Can I piggyback off that because investors used to view that national accounts as being a very price competitive type business that they're very fickle with pricing. Are you sensing, though, that things have changed in terms of how maybe these customers view your offering and sustainability that maybe prior cycles they were much more price conscious and now sustainability is much more in the forefront for investors, but even national accounts and corporate. Is that changing that dynamic a little bit more?

I think it has been a significant change in the dynamic and one that we expect to continue to be important. While large companies, I mean, I lead our supply chain organization at Waste Management, and I will tell you, I know that the charge of that team is to always look for the low-cost service provider, but it doesn't mean that we compromise on the level of service that we're willing to accept. And so we look for differentiated service offerings in our own supply chain, and I know that other large companies are doing the same. And with Waste Management's steps toward providing a level of reporting and visibility on waste streams for our customers, that actually is something that they see real value in because they have their own sustainability goals and objectives. And so by being able to deliver something to them that others are not able to deliver, the pricing piece of the discussion is not necessarily going away, but it's becoming secondary.

That makes sense. And you discuss landfills and your assets there. It's kind of interesting because I've been covering the waste sector for a few years now and landfill pricing has always been the holy grail. It kind of drove investors nuts because it's a scarce asset, very capital-intensive, yet pricing was always muted. This changed in 2019. I believe Waste Management reported its highest pricing at the landfill in over a decade. So I guess my question to you is, why was pricing muted before? What kind of changed in 2019? And is that type of pricing sustainable you feel like in 2020 and going forward?

Is it sustainable? Yes. And to comment on the investors' frustration, I would say that those frustrations were shared by a lot of the leaders who get to sit back in judgment from a corporate office and say, why can't we execute here. I think what's fundamentally changed is we're giving tools to our leaders who are boots on the ground with the landfill assets that they manage that they didn't have before. So they have visibility into how the cost of operating our landfills, constructing our landfills have changed and our responsibility to keep up with that cost increase, cost inflation. But more importantly, they're given insight into how well positioned our landfill assets are and understanding that our customers have choices. And they certainly have a choice to go to an alternative site, but we have to understand that their decision will be dependent upon things like transportation cost. And so if Waste Management's landfill asset is positioned such that the next best alternative requires an incremental X dollars in transportation cost in order to reach that site, we need to take that into account in how we're going to market with the price of that scarce asset that we have in the marketplace. And I think all of that insight is something that creates a level of credence and clarity for local operators that they didn't have in the past. And so we're executing well on giving them the tools that they need in order to sustain their business models in the field.

That's helpful. And we're hearing, even though landfill pricing is going up, cost running the landfills has been rising, too. Can you help bucket what is driving the cost at the landfill. And is the price/cost dynamic at the landfill at least starting to improve with these increases you're putting in or is it just kind of offsetting the higher cost you're observing?

So I think we have an opportunity to keep pace with and hopefully eclipse the higher cost. Right now it truly is about ensuring that we're keeping pace. I think that the cost increases have been most significant in 2 areas. One is the construction cost. So whether it be the labor cost for the construction processes or just the extensive infrastructure required as landfills become larger and more complex, and therefore, more complex. So I think you've seen landfill cost per ton from a construction perspective increase effectively kind of that 3% to 5% annually range. A lot of it's based on local dynamics, right? So it can vary across the network. On the operating cost side, leachate is far and away the factor that has increased our operating cost. Because of the nature of the landfill line of business, we are lucky enough to see that our variable costs are relatively low as a percentage of the total cost of doing business. And I think that continues to provide some strength in terms of ensuring that landfill pricing is providing appropriate leverage to earnings and cash flow. And we'll keep our eye on that, but that cost category is one that's increasing.

That's helpful. And I believe landfill and disposal pricing has an impact on the collection side. And we're seeing high collection pricing, strong pricing in the collection market. Can you help us understand what is driving that higher pricing? And more importantly, we've always been nervous that if Waste Management price is too high, you'll see the mom-and-pops, the small haulers out there come in and undercut you. It doesn't feel like that's happening right now. Do you foresee that happening? Do you understand why maybe these dynamics are happening, where in prior cycles if Waste Management ever tried to raise the price, you'd get a call and the mom-and-pop will try to undercut it.

I really do think differentiated service has been something that's been important. And while I'm really proud of what Waste Management is doing, I do think the large-scale providers have all made a concerted effort to just meaningfully differentiate how we serve our customers on the collection side of business. And I think that's providing a lot of strength in terms of our ability to price. I think the other thing that's interesting here is labor dynamics. And I think the last few years, you've seen labor dynamics in the space change because of the backdrop of the U.S. economy and the strength of the U.S. economy and the fact that employees have choices. And I know that Waste Management's focus on people first and thinking about what we can do to differentiate ourselves as a great place to work has been important. And we know that we've seen stories or anecdotes, but stories of smaller competitors who have a hard time identifying talent in a scarce environment. And so that's a factor. And I think all of that really comes back to, if Waste Management focuses on customer service and employee engagement and providing our employees an employer of choice, I think that those 2 things will allow for differentiated pricing in the marketplace.

And you discussed the labor pool right now. I mean I believe -- what is Waste Management's turnover right now? Because if I speak to some industry players, the private guys are seeing turnover, 30%, 40%. It's very difficult for them to run day-to-day operations when you're seeing that level of turnover. So I'm curious to hear what you guys are seeing on the turnover side and are you seeing the elevated wage pressure. Is that starting to abate or is that just kind of steady where it was the last few quarters?

So we have seen our driver turnover improve over 150 basis points in the last year. And I don't think it's one thing. I think it's a lot of things together. We've talked about it in terms of the investment that we've made in training. And that's important to our employees because it means that we care about them and that we're onboarding them in a way that shows that we want them to be best positioned for success in their jobs. So we've built 2 training centers and are really making a concerted effort to have all of our drivers go through this training center and learn best practices in executing on their day-to-day jobs. I think in terms of the other things that we're doing, I think investing in health care, as an example. Health care, we're all watching TV every day, and we know that in the national dialogue, health care is always central. And Waste Management has kept our employees' health care costs flat for the last 4 years. And that really is setting us apart. So all of that comes together to help us achieve that 150 basis points reduction in turnover in an environment where we see a really healthy labor market for employees. And we think that, that helps on our risk management cost. It helps on customer service, but it just helps in the overall culture of Waste Management. And all of those things are working together in order to make the investment really worthwhile. In terms of labor pressure, we have seen some slight abatement in terms of the level of impact that, that was having. I would say it reached a peak in 2018, and we saw a slight decline in 2019. And the level that we expect in 2020 is effectively a continuation of what we saw in '19.

That's helpful. And I know we were talking before about the transformation that has kind of played out with Waste Management. This is a big year for you guys. This year, I think around the end of the first quarter, hopefully, you'll be closing the acquisition of Advanced Disposal which was the fourth largest nonhazardous waste operator. Can you just help us understand maybe what you can share. There was a logic behind this acquisition. What made you feel ready that the balance sheet of the company is ready to do this acquisition and why not just continue doing your pace of tuck-ins and buying back your stock? What made this acquisition attractive for you guys at this point in time?

Yes. So the balance sheet, I think, without question, it was in the best shape of the company's history. And so we knew that we had balance sheet strength to do a strategic transaction. And I think there was a lot of dialogue as people saw that strength persist and then maybe get to a point where it didn't feel like it was at a sustainable level ask us, okay, why and what is this for? And I think there was a level of hesitation about what type of transaction they could see us do. I think that the shareholder response to the Advanced Disposal acquisition has shown you that we didn't just think that this was a good transaction. We think that our investors see it as a good transaction as well. I think in a lot of ways, it was timed exceptionally well because Waste Management, as we started the conversation about being able to take good, solid revenue performance and translate that into a multiple of earnings expansion and cash flow expansion, I really do think speaks to the value creation that we expect to see from this deal. It's about a $1.6 billion per year revenue company. And they have quality customers who are looking for continued good service, and we think that we can provide that in a way that we do it at Waste Management margins rather than Advanced Disposal margins. And whether it be SG&A discipline, capital discipline, ensuring efficiency in our driver workdays, which all of those things we've been making investments in and not just investing in, but seeing real traction and making strides in our ability to convert more of every revenue dollar into earnings and cash flow, that's why this transaction made a lot of sense. On top of that, I think it was right to look at the cultures of the 2 organizations and say, these 2 cultures make sense together and we're starting from a position of strength. When you look at the Advanced Disposal business, they really seem to focus on 2 things, and that's safety and customer. And when you have a team of people who are thinking about safety and customer every day, that's a great place for us to start from because those 2 things are important. They're part of the core commitments and values of Waste Management. So we know that we're starting from a place where these 2 organizations are going to mesh well, and that's important, too.

Since you brought up before the acquisition how strong your balance sheet was and still is, but it was a concern that it felt like it was borderline too strong. Was Waste Management indicating something about the cycle that they were seeing because they were being so conservative? I'm just curious where you feel we are in the overall waste cycle. Waste cycle, the waste industry is always viewed as a later-cycle industry. I'm curious to hear where are we with landfill tons below peak. What are you seeing with service increases and decreasing? Jim brought up a quarter ago that he was seeing some delay with special waste projects, but now it feels like the pipeline is filling up again. So I'm curious where you feel like we are in the overall cycle right now.