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

Hello. This is Michael Hoffman with Stifel. I'm the Global Head of Diversified Industrial Research. I cover environmental services. We're at the 8th Investor Summit virtually. Sorry, we're not in New Orleans. I want to welcome and thank for -- them for joining us. On the right of my screen is Jim Fish, President and CEO of Waste Management. On the left of my screen is Devina Rankin, who's the Executive Vice President and Chief Financial Officer. Welcome both of you, and thank you for making time to do this today.

Glad to be here, Michael.

Thank you, Michael. Glad to be here.

So start off with a high-level question because I think the garbage industry has a fascinating perspective on the overall economy, given the nature of who the customer base and what you see on a daily basis. What is your view, Jim, of how we're doing as an economy in the U.S.? And you have a Canadian business as well, so we could get that perspective as well.

Yes, Michael, I think the economy is doing amazingly well considering how -- that we shut it down. I mean it's never happened, right, that we've shut down the economy. So there are still parts of it that are not back up and running, and we service parts of that. The -- certainly, airports are maybe at half of where they've been before. If you're out at an airport, you see airplanes parked on the runways. The sports teams, I mean we -- I think we're -- we service over half of Major League Baseball, and there are no fans at stadiums right now. So that obviously impacts a piece of our business. 12% of our commercial business is schools. So while that is -- on a year-over-year basis, would be in a down -- kind of a downtime last year and, of course, down this year, the big question is what happens with schools here in the next couple of weeks. Our girls are starting virtually next week, and I think a lot of schools in Texas are going to be virtual. So there are pieces of the economy that still are not back up and running. I'm sitting downtown right now in Houston, and there really is nothing going on downtown. It is interesting when you get outside of the downtown areas, whether it's in Houston or Boston, they do seem to be up and running. And so a piece of our business is doing quite well. The industrial piece is doing reasonably well. Small container is doing well other than downtown and other than what's kind of directly tied to these parts of the economy that I just went through. But I would tell you, overall, considering how quickly we shut down, I think we're doing pretty well.

Okay. And Canada, a similar sort of message because it shut down more broadly and...

Yes. It's kind of one and the same. I mean Canada looks a little bit more like the Northeast U.S., which has been a little bit -- it was quicker to shut down and slower to recover. But we are seeing -- I was in Boston about 3 weeks ago, and Boston at the time was really starting to open up. We were down on the Cape. The Cape is open. You could eat in restaurants. So I have not been to Canada yet, but when I look at our numbers, they look pretty similar to New England.

Well, unfortunately, if you went to Canada, you have to stay for 2 weeks before for you can [indiscernible]

Exactly.

You're not going anytime soon. So with that said then, what I hear, and I've heard throughout the day is, we're back to a new normal. And then there's this piece that just isn't open yet, like schools, you alluded to. And that's what we're really looking for, is where does that reopening part, and then there's this filling back to pre-COVID level of activity of the new normal. Is that -- have I characterized that well as far as the economy and then your own business as it's reflected in it?

Yes. Look, I think businesses are doing everything we can to get back to normal. There still are people that are sitting at home. I mean we went to visit some friends yesterday, and they have not been out really since March, and they're here in Texas. So businesses are really, really trying to get back up and running. We're helping them to the extent that we can. I think you're seeing construction projects starting to pick up really across the U.S. and Canada. You're -- of course, the energy sector is soft right now, that's a very small piece of our business. But overall, businesses are trying to start back up. As we've discussed, the hospitality sector is going to be the last. I mean if you're there on the East Coast, Michael, I mean Broadway, I understand, is not opening until the -- at least the end of March of next year. So the hospitality sector, that's hotels, that's airports, that's sporting events, that's movies and theater, all of that's going to be, I think, last to open. But those businesses that are more critical to the way we -- to our lives, I think they've all tried to really reopen.

The next piece of this, sitting here today and looking backwards, I think we might be able to ultimately say, okay, the first part of the reaction was, you just got to shut down, whether it was a good decision or not, that's not to debate. You shut down. The second phase of this appears that most politicians are not reverting back to a full close, they're tempering. Would you agree that, that's probably the likely play, is that we're not going to get a hard close, we're going to temper? And therefore, what's open is open. We'll wait and foresee how things play out, whether we end up opening schools again or not. But what's open is open, and now it's about running your businesses. And so...

I think that's right. I think that's right, Michael. I don't -- I think governors have realized that, boy, when you shut it all down, their tax revenues shrink to 0, too. So I think governors have realized that we can't -- even with a Phase 2. And by the way, I was on a call with Dr. Scott Gottlieb a couple of weeks ago, I asked him that question. He believes we are in Phase 2 right now. There's all this conversation about Phase 2 in the fall, and he believes we're in Phase 2 right now. He also, I think, believes that -- on this same call, there were 4 CEOs that are the big pharma who are working on the vaccine, and they're cautiously optimistic about this. What I've told our folks is let's not count on a vaccine because most viruses don't have a vaccine. But I think, to your original point, the governors have realized that they cannot shut everything off, that we can operate safely. It's similar to what we're doing in our own business here, we believe that we can operate safely, not put our folks at an elevated risk and still run our operation.

Okay. So let's talk a little bit about what Waste Management did through it, and what I'm trying to tease out is a couple of things. One, the industry is capital-intensive and lots of people would have thought going in, how can you possibly adjust to capital-intensive industry cost-wise, and yet you did. But one of the things I'd like to -- I think I'm right about is, you took cost down a lot, added back some because you needed to add protect -- PPE and do the right thing by your employees, make decisions right by your customers, and yet you still ended up with a better incremental margin in the aggregate in the solid waste business. How much of that can you keep? And not so much the percentage. Is the idea that 40% was your incremental going into this? Even if it's 41%, can you hold the 41% because you figured out how to run with less sustainably as a result of this?

I will tell you this, I hate the term new normal, and I hear that all the time, and I hate that term. But there is a little bit -- so I'm going to use the term I hate here, which is there is going to be a bit of new normal for us in terms of how we operate. One thing we discovered, Michael, when we went into this was when literally volume dropped off the table in April, we had to flex down. And what we've learned coming back is that our overtime, for example, we're running -- we might be running down 4%, 5% in an area and down 25% still in overtime hours. And so John and Devina and the area of VPs, and I've had this conversation, which is, okay, so now we're back to, in your area, down 3% or 4% volume. You're still down 23%, 24%, 25% in overtime hours. That tells us that you don't need to operate with the same level of overtime that you were in kind of the old normal. So there will be a kind of retooling of how we run our operations as we come out of this. We want to learn something from it. If there's going to be anything good coming out of this, it would be that we've learned something from it in terms of how we can better operate.

Okay. And to that end, can you frame for us a little bit -- it's not a criticism, it's just an observation. You normally give lots of volume and core pricing data. I'm not going to ask you to go through all that in this. But how would we think of where July start -- ended versus how the second quarter was? So we help people have a baseline to think about where we are in the waste management business, Devina.

Yes, I think it's a great question, Michael, and it's one that really helps to frame what we saw in the second quarter and what it told us about being confident in providing full year guidance for the remainder of the year. Because the slope of improvement in volume, in particular, was something that was quite robust in the second quarter, and we saw the positive trend continuing into July but at a slower pace, right? So the slope has kind of started to moderate, which I think everyone expected and saw as something that should give us some context for what to expect for the remainder of the year. I think the 2 primary categories that really frame that the best are commercial collection and MSW. Commercial collection in the month of April was down in the ballpark of 14% on a volume perspective. MSW was around 18% in April. Both of those had improved significantly in June, and the rates have continued to improve as we look at July, though, as I said, at a slower pace. In June, commercial collection was down only 8% from a volume perspective, so substantially less, effectively making up almost 50% of the downturn. And then MSW, really impressive, had improved to volume declines of only 3.5%. So both of those are really strong indicators of where we have landed in terms of our outlook for the full year. We expect full year revenue to be down in the range of 4% to 5% on a year-on-year basis, and that compares to 9.8% in the second quarter.

Okay. All right. I think that's -- and when you think about that 4% to 5%, my guess is at least half of it is probably things like education, sports and some of that entertainment.

That's exactly right.

Maybe it's 2/3. And the other 1/3 is, sadly, some companies are not going to make it. There will be some loss of business.

And then in addition for us, the comps on special event work, in particular with the wildfires in California in 2019, that had an impact on the back half of the year comparisons that we expected. But those other macro elements that you spoke to with education, sporting events, those are really the fundamental drivers that we look to in building that outlook for the remainder of this year.

And so I'm trying to figure out how to say this without using that term you don't like, Jim. So we're in this lowering level of activity to -- would you -- have you done everything you needed from a cost standpoint to be there now? And then any changes marginally on their edges are made at the time and you -- and this -- whatever incremental rightsizing is done on much smaller pieces going forward? Have I made sense to that question?

Yes. No, that's a good question. I would tell you I never -- I'm never fully satisfied with what we've done on the cost side. So the answer to that would be no, but I would tell you also that I think we've done the majority of what we hope to do in terms of cost flex during this pretty quick downturn. So we've learned some things about our SG&A. We've learned that we can run at a lower SG&A number, and we've been good at managing SG&A over the last 3, 4, 5 years. I do think there's some additional cost, things we can do, particularly as we bring technology. And I know we're going to talk about technology in a little bit. But as we bring in technology, there will be some cost savings from that initially. And then we'll see -- we hope that we get a bigger slice of the revenue pie down the road as we truly differentiate ourselves. But just specifically on the cost side, I think we've done, I would say, the lion's share of the work, but there are still some things we have left in the trick bag.

Well, and I'm assuming the ongoing efforts to do things like get the call centers to more automation, less live calls, the -- I've forgotten the term you used for it, but it's the $75 million where you're taking the minutes out and per route. So you have a term for it, but I forgotten what it is, but...

M100.

Yes, M100. That's -- all those things are ongoing. The pandemic slowed some of that pace of it, but it's still -- you're not taking your eye off of it. You just...

Yes. Look, I would tell you, Michael, I'm optimistic about WM, and I'm optimistic about the industry. I think the industry is -- I'm not here to speak for the industry, but I think the industry has done a really good job of flexing quickly. It was interesting watching some of the other guys' reports. I mean they did a really nice job at the other 2 big companies of flexing their cost structure quickly. I'm optimistic from a price standpoint about WM. I obviously won't speak about the rest of the industry there, but we think what we did is going to be a long-term benefit to us. We did give a break to our small customers. And I talked to a bunch of CEOs about this early on. I had a call with 10 Fortune 100 CEOs that I know, and I set it up, and they all joined. And I said, "Look, small business is going to be at greatest risk here, we've got to do something to help small business." And with complete unanimity, there was agreement there. So a lot of companies have done a lot to try and help small business. And we felt like coming through this, we needed to try and step up and help those small and medium customers that we have, and we knew it was going to impact the price. But long term, Michael, I think that's the right step for us. I think it develops a sense of loyalty to WM. And I think we'll get -- look, our price will -- we will get back to what we talked about in terms of revenue growth and yield and core price growth, but we want to make sure that our customers are back on solid footing before we try and give them a price increase.

Fair enough. And let's -- I'd like to disabuse the market of something that -- comparing price across the companies is always this interesting challenge, right? And your [indiscernible] the other guys. And so I want to disabuse the idea that you're trying to fill the cannon by using price. You're not trying to fill the -- the cannon got depressed because of the pandemic, it's not being filled by you using price.

Right.

Let's just take it off the table, right? I mean everybody should stop thinking that your price is lower because you're using price to fill the cannon.

No, no, no. Yes. No. I mean we did this with one thing in mind, and that is to make sure that those small businesses, and they are our customers of -- look, small businesses across the board, they're all customers of somebody in our space. And so our small customers, we wanted to make sure that we were sending the right message to them, that when you're asked by your government to shut down on March 15 and you stay shut down in some cases until June 1, boy, the last thing you want is to have a -- have one of your vendors. And essentially, we're a vendor to them stepping in and saying, look, where is our price increase that you normally give us every year? So this is not a way to go and replace volume for us, this is a way to ultimately establish a level of loyalty with those customers. And the lifetime value of those customers is hugely, hugely important to us.

Okay. Devina, so I encourage Waste Management to start giving out the core price volume by the line items again because I think there is value here. I think there's an opportunity to -- without, again, I don't need that number on this stuff. But the point I was trying to get at is your core pricing in comparison to your single biggest peer, which you overlap each other, I don't know, 85%, 90%, were right up to the pandemic very similar. I mean there's some small differences but very similar. And the message here is your core pricing coming out of this, once we get back into a budgeting season and you see what your business lines are, are going to look a lot like what core pricing was historically. Is that not a true statement?

That's absolutely a true statement. I think what you saw in the second quarter was much more about that focus that Jim mentioned on the lifeline that some of our customers need in this environment, and that includes not being ambitious with regard to normal course price increases and thinking about the right kind of fee moderation, fee reduction, bypassing fees that might have been customary in this environment. But those are steps that we took because it's the right long-term decision for the customer. In terms of commitment to the core price strategies that have been strong for waste management and a reflection of our strong execution to overcome price increase or cost increases in the business as well as inflationary cost pressure in the capital part of the business, those commitments are rock solid, and we continue to execute on them consistently.

Okay. So I would venture a bet that you do this because I try and do it, and you have more knowledge than I do because of the aspect of the business. I suspect somebody on your team, Devina, is trying to recreate the reported price of your peers just based on the data they deliver. So what stands out as differences about what might be and what drives the actual reported number so people don't just keep looking and going, why is there's almost 0.5 point less than the other guys? What are the things that people should know about the way you do this?

Yes. I think really the difference for us is core price versus yield in those 2 measures and what they represent. And yield used to be the thing that everyone tried to compare across the industry, and it has some complexity because of differences in volume trends that happen from one company to the next, where as you -- we saw -- as an example, in the second quarter, we saw the decline in volume actually increased yield relative to core price, not a traditional comparison that you see in that environment. So what we are working to do, and I think the others in the industry are doing as well, is focusing on that core price measure, and that's one that we think can get more and more comparable over time. I think when we look at our core price and other things that we did in 2020 is migrate toward an adjusted core price measure that takes out some of the volume noise as best we can and actually uses real unit data. I think everyone is using data in a more refined way over time and take some of the estimation out of the core price measurements that used to exist. And as a result, I think you're going to see better comparability across the space over the long term.

And is it a fair observation that you know what you did in deals, you know what the ton number is. And so when you saw for the ending number for total revenue growth that you're solving for a rate of dollars of revenue change and then you call a price?

So core...

Is that -- that's an oversimplification but...

Yield, I would say, yes, in a lot of ways, that was true. On the core price side, this is really pricing activity that's happening on the streets every day with our customers, and that's a science that the team has done really good work to get us more refined around measuring.

Okay. How [indiscernible] used to be this great proxy if you had a million starts or greater, [ new household formation drive, ] new business formation? And this is a little bit of what do you think might happen this time question, broadly, is will we see that entrepreneur look at the empty storefront and the local strip mall and say I'm going to build that bar I always wanted to build. Is that -- is some of that commercial absorption of capacity, of real estate that leads to a new commercial customer, how do you think that might play out this time the way you're running your business is the other side of that?

Yes, and there's been a lot of comparisons drawn from that standpoint between this downturn and the kind of '07, '08, '09 downturn. One of the big differences, among many, is that you have this huge -- in the residential and commercial, honestly, real estate sector is back then a big oversupply, so particularly residential, though. And you don't have that this time around. I mean there -- many would argue that there's an undersupply of residential -- of new construction within residential homes. I do think, though, you make a good point about commercial construction, and I think what we'll have to see is how much -- how quickly does the economy come back because these -- the small businesses are going to have to -- they're going to be in a little bit of wait-and-see mode until the economy starts to show that we're emerging from this pandemic. There is some fear out there around the pandemic that this lasts for a long time, that we're going to have to wear masks for several years and that we're not going to have a vaccine. I'm a little bit more optimistic here. I do think that whether we have a vaccine or not, I believe we learn to live with this, just like we do with most other viruses that don't have vaccines. So I think we get back to flying on airplanes. I think we get back to going to plays and ballgames sometime in 2021. I don't see -- I honestly will be surprised if football season completes this year, whether it's professional or college. But I think by the time we get to next year, whether it's baseball season in the spring or football in the fall, I think we will be back to where we -- not maybe fully recovered, unless there is a true vaccine and -- but I do think we'll be back to a -- starting to kind of grow the economy, again, albeit at a slower pace. And therefore, I think you'll see these commercial businesses start to grow, which is why I see -- we've always kind of telegraphed 4% to 6% revenue growth. And will we be at 4% to 6% revenue growth by 2022? I think we can realistically say that's -- and I said it on the earnings call, the first real kind of good year-over-year comp will be Q1 of 2022 because the rest of this year is going to be difficult comps. Next year is going to be easy comps. And by the time we get to 2022, I think you'll start to see a decent year-over-year comp. And I think we can start to think about kind of that range that we've discussed in terms of revenue growth, and that will be an indicator that commercial business is back.

So I have to ask this question because you're in a unique situation. Do you think that you have spectators at the Open?

I actually -- we've got a meeting with -- in September, we're meeting with Governor Ducey. We're meeting with the Thunderbirds, who are the philanthropy that helps run the tournament, and ourselves and the PGA. And I'm lobbying Jay to actually have people there. I watched a little bit of the golf tournament yesterday. Look, it's fun to watch the guys hit golf shots, but it's -- I'd just would rather see -- I'd rather hear a big roar when somebody makes a putt than just crickets. And so -- and particularly at our events, where last year we had 800,000 people there for 4 days. I think -- I don't know whether we'll have the same size crowd. That's probably a stretch. But I'm lobbying Jay to have fans at our tournaments, and we'll discuss it in -- we have to discuss it in September because, believe it or not, those stands started to be set up for that February golf tournament. Because there's so much out there, they have to start setting it up at the end of September.

Holy smokes. Well, I assume if you have fans, you'll do the sustainability for them, too, then?

Well, we are going to definitely do the sustainability for them, although we've decided we're going to do what you're doing here, which is have this year or this coming year to be virtual, and then we'll go back to a live show in 2022.

Okay. Well, that's good to know. All right. So let's talk about M&A, and I can't not ask you about it being disposable. What I want to ask about is the mechanics. Where are we in the mechanics? Like is -- I hear from my sources, there's a draft consent order in front of staff. So is -- are we getting close?

Yes, I think we're getting close. I mean it's impossible for me to speak for the guys at -- the folks at DOJ, but I think we're getting close. We said end of third quarter in the 8-K when we recut the deal, and we stuck with that. And so I'm not going to come off of that, but I would tell you we're getting close. I think the ADS, the shareholder vote -- their shareholder approval, we expect to come, I think, it's the 25th. So I would tell you it's going to be -- we're hopeful. I'm confident that we will have this thing done in that time frame that we originally committed and hopeful at the front end of that time frame.

All right. So here's the -- it happens. You get to close it on September 30. What are the sort of first things that happen in fourth quarter? What are the things that we should be thinking about as we're modeling? And not necessarily what's the dollar revenues, it's the -- what do you do? What happens?

Yes. It's a good question. We actually just spent 1.5 hours on a call this morning with the team that has been doing all of the background work, all of the preparation work, Devina's team, and she can speak to it better than I can on the financial side and making sure that just things that seem kind of pedestrian like budgeting that's -- or forecasting that that's not pedestrian when it comes to 2 different companies. It's something we do well, and we do it every -- honestly, every week. But how do they do it? And so they've been spending a lot of time with their peers. We're getting technical service agreements in place. We've got to make sure that the HR side of this is nailed down, who's staying, who's not staying, make sure we communicate to them, things as basic as having a WM representative at all of their operations on day 1, so that they start to understand what our protocols are for safety. We're going to give them a safety package with a WM mask and a hand sanitizer, and we'll talk about what we do from a safety standpoint. All of that has been ongoing. And if there's been a silver lining to the delay that we've gone through, it's been that it's given those teams a chance to do more work. And so we should be able to hit the ground running, certainly running quicker than we would have had we closed this 2 or 3 months ago.

And Devina, when do you think you get the business -- the whole company back below 4x leverage? It's closed, you financed it through the balance sheet as it exists the way you talked about it. How do you get back -- when do you get back below 4x?

So luckily, we're starting well within 4x. You can think about run rate debt balances at around $14 billion, maybe a little north of that in the short term as we think about deploying the divestiture proceeds. And then with our pro forma EBITDA -- or with our EBITDA combined with the ADS pro forma EBITDA, we're closer to more like 3.25x and below that from the starting point. And so we're really comfortable with where we are from a leverage perspective. And within 12 months, I think we'll be back within the targeted range of [ 2.5 ] to 3.0x.

Okay. Last 2 questions. We actually -- this has gone much faster than I thought. So the digital question, which I mean, fortunately, it's going to be a little truncated, but Jim, frame for us how you think Waste Management came through this relative to what your digital footprint is today and what it shone the light on that was really good in the area of others where you knew, okay, we're going to push Nikolaj to get up there faster on the digitalization in the business.

I think what it did show us, Michael, was that companies that have a true end-to-end solution are going to be the winners coming out of this. If you look just simply at stock prices, not necessarily in our space, but if you're looking at those companies like Amazon, like the tech companies like Microsoft, those companies have really come out of this extremely well. And so it's something we talked about a year ago, but what we did learn was that we can expedite this. We can move more quickly than we originally thought. And we learned that by this kind of move to work from home, which we probably had you asked us in January, how long would it take you to transition 20,000 people to a work from home environment, the answer would have been probably at least 12 months and maybe longer, maybe 15 to 18 months. And we did it in 10 days by necessity. So what we learned was that this movement to a true kind of end-to-end solution, where our customer is handling everything from set-up all the way to delivery confirmation, that can be done more quickly than we originally thought. And I think you'll see a lot of that coming to bear even before the end of this year.

Okay. And then lastly, ESG is the topic du jour, but I'm asking this question more from a perspective of -- help talk a little bit about it, and I only got a minute, how this is really part of your operating DNA. This isn't just a box you're checking that what you're doing in ESG is about what you do every day running the company. That is part of strategy and vision and corporate planning, and now we should measure it and tell everybody what we're doing.

Yes. If I think about the E piece of that, I mean it's really the importance of recycling to not only to us but to the environment overall. We've talked about the recycle plan of the future. It's doing very well. We're very excited about that. It feels like it's a blueprint for future facilities, and that is a good thing for the environment. On the S side, you've heard us talk about people first. And so people first includes more, though, than just -- some people mistake people first as being something having to do with pay or benefits. Look, a lot of people first is diversity and inclusion, for example. I'm proud to say that it didn't take George Floyd to kind of stoke that fire for us. I mean we've been doing this now for 5 or 6 years. I am in the minority on our Board of Directors as a white male, which not many Fortune 200 companies can say that. And our -- we look very different from a -- not just an SLT, but from an overall management standpoint. So diversity and inclusion is a very, very important part of the social aspect of what we do. And then on the G side, on the governance side, I mean, I think that's been something that's all companies within this space have been good at for as long as we've been in the business. So I think ESG is ultimately part of what we do each and every day. It's an integral part of our business.

Well, I have way run over time. I got to jump on the next one. Enjoy the rest of your summer. I'm going to see that cool plant on Thursday or Wednesday, and I'm looking forward to it. Thank you for the time, and hopefully, we're doing this in Vegas on the 26th of April next year. Talk to you soon.

Absolutely. All right, Michael.

Thank you, Michael.

Thanks.