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

Good afternoon, everyone. This is Michael Hoffman. I'm the group head of industrials research at Stifel. It's my pleasure to welcome Waste Management and Devina Rankin, Chief Financial Officer; and Ed Egl, Vice President, Finance on our panel today. Hello, everybody. Welcome aboard.

Hello, Michael.

Thanks, Michael.

So let's jump right into the deep end, and I've been asking this question this way for the last couple of days. Can we talk about the last 6 months and before, during and after at a high level? And then we can dig a little deeper into some of the more specific trends around lines of business. But if you could, I think it's useful to frame what garbage looked like for Waste Management January and February. What happened in the during? And I feel like we're in an after phase at this point, that we've gotten through the crisis and now we're in the -- things are restarting and we're in the after. And kind of frame the trends at a high level, and then we can dig a little more deeply.

Sure. So I think the way to describe the before period was execution going according to plan; industry dynamics in the best shape that we had seen at least in a decade, if not longer; and Waste Management performing at continued very high levels and with very strong execution front and center and expectations that we would continue to grow and execute well to generate even greater margins and free cash flow conversion in the business over the long term. During, I would say what we saw was a pretty sharp decline in our highest-margin lines of business, namely industrial collection and landfill with commercial collection following thereafter, but the team very much aligned, putting people and safety at the top of the priority list; executing in a disciplined way in order to serve the customer and really ensure that we're all aligned around servicing the customer in the best way that we can, recognizing that they're going through a great deal of change as well; and using technology to more quickly adapt our business than we would have been capable of doing in a different environment. And so the team really rallied. I would tell you that the during period, while we know that the North American economy and really across the globe people were dealing with a level of uncertainty that we haven't faced as society in my lifetime, I know, I think that what you saw was the Waste Management team come together in a way that was trying to create some certainty in an uncertain environment for the employees, for the customer. And those things would generate the best financial outcomes and returns that we could deliver given the circumstances. The depths of the during for us in those declines that I mentioned in the industrial line of business and landfill volumes were down at their peak around 20%, and commercial volumes were down 16%. And in the after period that you've mentioned, which, generally speaking, I think we would agree with you that we're certainly in an after, I think there's still a need to focus on the fact that with the pandemic, different parts of the country are coming out in this after period at different paces based on local government decisions and mandates. So the after period, I think, is one where you see a little bit of a different recovery cycle than what you would traditionally expect, where it might be dependent upon where we are in normal seasonal factors, as an example. And instead, seasonality isn't what's coming to play for us. It's whether or not governments have made decisions that -- or the health of communities have allowed them to enter into Phase 1, 2 or 3 of a recovery.

So let me tease on that a little bit, if I could. So if you had a market, I think maybe like a Texas might be a good example, it's basically fully open, and I think we've now been fully open in Texas for a month, so you've got a reasonable set of data, how would you characterize the -- things like the service interval increases versus decreases trends or the can weight trends or landfill volumes relative to even an expectation of what a budget was supposed to be for the year? I mean having opened wide up, are -- in the fourth week of this, are you back to a near pre-the-pandemic activity? Or is it a steady trend line towards that? Help us with that. And then I'm going to touch on some of the other aspects.

Yes. So the data that I talked to you about and the technology enablement that is the engine to that data is giving us really good data and insight in a market-by-market way that allows us to look at those trends. And while Texas has been open, as you said, for about a month now, we're far from at-normal levels or pre-COVID levels. Ed and I both live in the Houston area, and I can tell you that while in the depths of the pandemic people were only able to go to grocery stores or hospitals and that we can now enjoy things like going out to dinner at a restaurant, we're certainly not back up at 100% capacity in commercial business activity in the Houston, Texas market. And I think that, that's what we're seeing in terms of the volume recovery in our business. So while service intervals have increased in the commercial line of business, as an example, so small businesses that may have suspended their service have certainly asked for service to resume. But at the same time, container weights are not where they were or projected to be pre COVID.

Are they incrementally improving? So it's a small amount. Just that -- and where I'm underlying this, at the end of the day, consumer engagement drives the activity levels around the garbage business. And so is the consumer each week just a little bit more comfortable and each week your truck across the scale off a route is a little bit heavier?

I would say with one small caveat that I would tell you that, that's what we're seeing in our data. As you know, the Memorial Day holiday has been in the last couple of weeks, and so there was a little bit of an interesting trend in volume data with the Memorial Day holiday and then volumes coming down a bit after that. I think that, that just means a lot of people had some pent-up desire to get out. And so we had an uptick in waste volumes that then didn't repeat. But if you strip that out and look at the general trend, you're spot on. We're seeing those nice incremental pick back up in volume levels that we think indicates a strong and consistent return in this environment, which is, I think, the best any of us could have expected.

So given that you are parsing data and disaggregating it in lots of different ways, is there a data point that we could share that talks about what percent of the total company is still exposed to partially or maybe even not even open? I can't imagine there's any place that's not open at all, maybe New York City. But I think everybody -- every state is now open in some form or fashion. So what percent of the book of revenues is exposed to a partial at this point versus open in this -- and so that's not the encumbrance now, it's just getting comfortable with being active in an economy that's open.

Yes. I can't specifically give you percentages. I think what I would say is what we're seeing is the strength of the volume is closely following on a market-by-market basis. It's closely following what we see in the way of the general mandate of the government. So the level of recovery has been strongest in -- where you would expect it to be, Georgia, Florida, Texas as examples, and then the rate of recovery in places like California or the Northeast has been slower.

Canada, I assume that was a national shutdown. That's a similar issue?

Yes, that's a similar issue.

Right. And where you had a -- and why I'm parsing is data is because I get asked this question this way. Where you had a state that did a partial but is now fully open, is there a pattern of data that's worth sharing for people, which is that there might be actually set point movements instead of gradual, that there's a step and then it's a gradual and then another step as they open another phase and then the gradual and then another step? Is that the way to think about states that are doing it in phases as opposed to states like Florida or Georgia or Texas that said we're open?

I wouldn't say that I've noticed anything that is markedly different from one place to another with regard to how they -- how the states have opened. Our local leadership might speak to that differently than I am able to based on the macro-level view that I try and accumulate using all of the insight that the organization has. But what I would say is, what was really part of the dialogue coming in was whether or not this would be a V-shaped recovery. And I would say that the slope of the downturn -- because, I mean, instantly, the country went from fully opened and on flights and in hotel rooms and at large conferences and the like one day to the very next week everyone was essentially under stay-at-home orders. And we are not seeing that same pace of recovery such that we expect or are seeing of the -- in volumes. There's a little different change in the slope on the recovery side than what we saw in the downturn. And that slope, I think, is what's going to be most telling about the revenue outlook for our business over the rest of 2020.

Okay. If I could tease out some other data. One of the things that gets reported a lot is we're working from home and therefore there's a lot more trash. We kept sort of studying this, and we think this observation is accurate. And we'd love your insight because you have a lot more data, is that the initial shut-in, nobody knew how long it was going to last, and there's a whole behaviorisms around being all at home, everything from buying way too many things, including perishable foods, and doing the long list of home projects that spikes volume. The data we've been looking at suggest that volume is still up, but it's a lot lower than the peak because we have now found a normalized pattern of -- since we're in week 14 of this, of what that means, life at home. And so this has settled in. It's a little higher. And it's not 20% or 30% now. It's more like 8% to 12%, but it's -- and it's higher. But that's -- is that an accurate assessment of what you've been seeing on the data as far as the trend? And then I want to talk…

Yes, that's definitely…

Sorry.

Yes, that's definitely consistent with what -- I'm sorry, Michael. It's consistent with what we saw at the peak. And this actually varied across the country, which I think was a little surprising to us. But at the peak, we saw container weights in the residential line of business from work from home up in the 15% to 25% range. Those have come down meaningfully. The 8% to 12% that you mentioned is pretty reasonable. I would say we're probably closer to the high -- or the low double digit, so more like 10% to 15% in what we're seeing changing as everyone gets more accustomed to working from home.

Right. So there is this line of conversation going on, which I think is misplaced, but I need to talk about it, which is only going to -- that's going to lead to margin compression because you're getting more weight and you've got -- you're not getting paid for it. And I want to talk about it from 2 angles. One, there's a mix issue. How much of the business is subscription versus not, which allows you to capture some pricing? But two, then there's the whole corporate part of it, is -- while there might be some pressure specifically in residential, I think there are offsets. Like your container weights are light still in commercial, but you're getting paid. And then you've got third parties who collect residents, who have more volume, who use your landfills, and that's huge margin. So when I balance it all together, I don't think we should all wake up going, oh my goodness, there's this secular, systemic margin trend, negative, because of the things I just described. Can we tease all that out? And do you agree or disagree with parts of it or not, any of it or all of it?

Yes. I think I agree with a lot of the parts. I would say I'm a little less optimistic that they all balance out such that on the whole, the margin doesn't see some pressure in the near term. So what I would say in terms of container weights and the exposure to how much of that WM retains the risk of, we've estimated that WM incurs the incremental cost of higher container weights for about 40% of our residential line of business and the rest of that is passed on to the customer in terms of the cost to serve and the price that they pay for the service. In the commercial line of business, you're absolutely right that container weights being down means that our cost to dispose in that line of business is lower. So the incremental margin on that business should be higher. But what is happening is with the level of service suspension that we have seen in that line of business, which was meaningful, we certainly are seeing that margin deteriorate slightly. And we think that, that needs to see those suspensions turned off and businesses open again. And while you said earlier that a lot of markets are fully open at this point, some small business owners are still finding it difficult at reduced capacities or reduced levels of foot traffic that they're not opening their doors yet. And so until their doors are open and they need their service again, that downward pressure from the revenue side in the commercial line of business will put some margin pressure on the business. And then in the landfill side, you are absolutely right that if third-party haulers are bringing those incremental weight from the residential line of business into the landfill, we should see some value from that because of the high incremental margins of that business. That being said, for the WM tons in our space, we have seen special waste and C&D disproportionately impacted on landfill volumes, and those are really good tons. And so the impact of that is not inconsequential.

And it -- because we're not in a full open, even if it's a gradual reengagement, that hasn't bounced back quite as strongly as you need it yet?

That's right. I mean I think in particular in C&D and special waste, what you're seeing is some of the large companies that have special projects that drive some of that activity or a great deal of that activity are looking for a level of certainty. And in addition to certainty, economic certainty, I think they're looking for an operating environment that gives them some security that their employees can return to work sites safely, and there's some caution there. So those 2 things together, I think, mean that there's a little bit more a gradual return in that environment.

Okay. I'm not trying to lead this too far, but is it an unreasonable assumption that if we're open, everywhere is open, we finally get to that everything is open as far as economies, that the scenario I described then becomes more of a -- realistic because then the whole economy is trying to be back engaged even if it's at a lower starting point and those pieces balance out and the margins kind of start to help take care of themselves? But we're still in a phasing of that. That's why you're being cautious?

I think that's right. I mean I think the business model which we've demonstrated for many years gives you those fundamentals that you've spoken of that allow for the margins to continue to provide value. We're also working on our cost to serve in this environment. And one of the things that we've seen give us tremendous value is the technology investments that we made in past years, and those are continuing to provide us momentum in terms of managing our cost to serve down because it gives us better ability to flex the network. We're also working on decreasing overtime and looking for ways that those declines in overtime hours, which are the most expensive hour in the system, can translate into perhaps longer-term views of the overall cost of overtime required in order to serve our customers and that maybe those things that we've found as valuable in this environment can continue once the economy is completely back open. I do think that the optimism is appropriate. I think that this business is one that is resilient, and the investments that Waste Management had been making in people and technology will bolster the ability to generate incremental margin growth as the economy returns.

Okay. So that's a perfect segue into the M100 program and the call center upgrade. So this has been a -- and just to repeat for everybody, the M100 is -- you all have done a very good job of addressing that first, whatever it is, 15 to 20 minutes and the ending 15, 20 minutes of a day and maximizing people's -- not wasting time there. But in between, that driving part of it, there was progress to be made. That's the M100. And is this environment helping to bring incremental focus and acceleration around that? And talk -- because there was a real cash savings there that was going to add about $150 million of potential cash leverage net by successfully pulling out minutes. And I think of the business -- so the 2 major levers here are time and weight, right, and you're trying to figure out how to maximize utility and asset utilization around both of those.

Exactly right. And M100 is in full swing. And just to clarify there, we were looking at $25 million of incremental value for every 1% improvement in efficiency. And we expected over a 3-year period to get to about a 3% run rate of efficiency improvement, and so an incremental $75 million of labor cost is what we thought we would get kind of on an annual basis. We -- going into 2020, we're about halfway through the implementation process and thought that we had another, call it, 1.5% of efficiency to go. What you've seen in this environment is actually that so much of the efficiency come from less traffic on the roads, and it's hard to attribute the efficiency gains necessarily to the continued execution on M100 so much as it is the fact that you and I aren't driving to work every day. And as a result, the trucks are able to service their customers in a more efficient manner than they were in a pre-COVID environment. I do think it will be interesting to see how much incremental efficiency we can hold on to in a post-COVID world, where work from home, as an example, is more a part of everyone's reality than it had been in the past.

Okay. And then having to take all of your CSRs and moving into a work from home certainly put a big spotlight on your efforts to improve the productivity of the call center. So with -- is that move to be able to get away from live calls into using technology and the cost differential of $0.20 for technology versus, I don't know, $6 to $8 a call live as -- where are we on that?

We've got some work to do. But what I will say about COVID-19 is if it did nothing else, it got our team focused. And that means that the initiative that we've been talking about in terms of using technology to differentiate the service for the customer is front and center, and it's something that the senior team has aligned on as a top priority for moving our organization forward so that we don't just deliver today but really find ourselves better positioned for the rebound. And while I would say we're not where we want to be in terms of that call center optimization model, it is part of what WM is investing in today with its technology platform. And we expect to have the organization very aligned and intentionally focused on executing on that initiative such that you'll see meaningful benefit over the next 18 months.

Okay. Working capital is always one of my favorite things to ask you about. And is this an environment where you can pay your bills slower and save days and pull that cash out of the business?

Paying the bills slower hasn't been our top priority with this environment. We've been really focused on the customer receipt side because we -- as we mentioned in our Q1 call, we had seen our customers take their own proactive steps to protect their liquidity. And so we saw some slow pay beginning in late March, and that continued in April. We've seen a nice return in May, and we're optimistic that we're going to be where we need to be, to more of a normalized level coming into June and Q3. But ultimately, our team is always focused on bringing those 2 into parity and, if not parity, crossing over so that we have some nice arbitrage value there. But at this point, we really need to, as an enterprise, be focused on the customer because that's where we see the most risk for slipping from the progress that we've made to date.

Okay. And then on cash flow, are you a beneficiary of the CARES Act I'm assuming on payroll tax deferral, cash tax deferral? And if so, can you share the scope of what that could be?

Yes, we are. And right now, our estimate is that it's in the range of $100 million to $125 million.

$100 million to $125 million?

Yes.

Right. Okay. Cool. So needless to say, I have to ask about Advanced Disposal. But what I'd really like to ask and do is refresh sort of things that people need to know about the deal structure. You all have revised the market's expectation of the close to potentially be the end of 2Q. But within the deal structure are opportunities to walk away if -- and I just want to remind the market of those. I mean correct me -- if I got the right numbers. Divestment of -- sales of assets -- revenues of assets sold greater than $200 million, that is a point in which you could revisit with Advanced Disposal and either change the terms or walk away from the deal. That's correct?

That's correct. The $200 million reference point on divestitures is correct, and that's tied to…

The consent order.

A termination fee that would have to be paid in the event that divestitures exceed the $200 million level.

Right. Am I -- do I understand the other part of the terms that if a consent order couldn't be reached and you hit July 13, that the deal naturally terminates and there are no fees on either party's side? Is that an accurate understanding of it? This is a big document, and it's full of legalese.

Yes. That's not how I would describe it. But I would point our investors back to -- in spite of it being a large document with lots of legalese, I would point investors back to the agreement because it spells everything out as clearly as possible in this. But basically, what I would say is reminding everyone that what we've mentioned before is the Waste Management team works closely with the DOJ to continue to move the transaction forward, and the statement that we made about expected timing is the best that I have at this time.

Okay. And then the last one on that vein is DOJ often requires approving of a buyer group for divestments. Did they do that with you? And have they given you an approval of potential buyer groups?

I can't speak to that at this time.

Okay. And then the state of Advanced Disposal's business is very different from when you all announced this a year ago. What's your message to the marketplace about how that value creation works given that it is a smaller company today that -- between its own operations and the COVID? How do we extract value out of this transaction at this point?

Yes. I would just say that Waste Management focuses on investing in assets and businesses that provide strong return on invested capital and long-term growth outlook, bolstering the long-term growth outlook. And as we look at the Advanced Disposal business, we see a business, as we mentioned at the time that we announced the transaction, that has good assets in good markets and that it also has a culture and an employee base that supports customers that we welcome both from an employee and customer perspective into the -- or look forward to welcoming into the WM family.

Okay. Last question, ESG. So increasingly, investor population globally is talking more and more about ESG as part of a framework in which they're doing investing. And it's not truly just dedicated to somebody who's running a fund that's got a sustainability mandate. They're more -- this is becoming more mainstream. Can you talk about where Waste Management is in the context of this topic, goals that you've set, time lines, so that the marketplace appreciates that you don't get stopped and stuck at, hey, this is a company that has a bunch of landfills, oh, it can't be a good ESG company? Why is this somebody that should be viewed through -- favorably through an ESG lens?

I think viewing us favorably through an ESG lens really is centered around the organization's focus on the environment as one of its top stakeholders. And WM has always been focused on protecting the environment and preserving resources, which is a part of both the way we manage the landfill network but think about optimizing landfill waste-to-energy businesses and investments as well as the recycling line of business. In addition to that, I think it's important to remember that this is a business that is still very human capital intensive, and the S in ESG is just as important to Waste Management as is the E. And 45,000 men and women who make this business work each and every day are our top priority, and the social impact that it has to have positive impact on the communities we serve by leading first with those employees is crucially important to our mission and what we set out to accomplish.

Terrific. We've exceeded our time, Devina. Thank you so much, Ed, for joining us today. I hope you enjoy the rest of your day doing the one-on-ones, and we appreciate your participation in CSI Boston virtual.

Thank you, Michael.

Thanks, Michael.

Bye now.