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

Okay. Now I'd like to introduce Mike Watson, Chief Customer Officer; Brent Bell, Vice President of Recycling; and Ed Egl, Investor Relations at Waste Management. Waste management has 420 million shares outstanding, trades around $120 for a $50 billion market cap and $13 billion of net debt. Gentlemen, welcome. Before we get started, I would perhaps like to ask you to provide a few highlights of what differentiates Waste Management.

Sure. Well, thanks, Tony. I think there's a few things that differentiate Waste Management. Number one, I think it's our culture, focusing on our people first. That's been a huge driver through how we've navigated through the impacts of COVID. Number two, I feel that we have a massive asset base and a very diverse customer base that helps us insulate between the undulations of the economy. I think we've made a huge investment in technology that's only -- not only helped our people but also our customers, and I think it's also going to eventually help our shareholders. And I think lastly, I think we have a differentiation value inside our brand. I think our brand has really been elevated over the last several years. And I think it's definitely from our awareness, availability, favorability. I think it's definitely a differentiator for us, and we feel that's going to also fuel our growth as well.

Maybe you could -- before really get started into the operations, you could discuss the current dynamics and how are -- in a business sense, how are you handling COVID.

Well, I think for us, obviously, safety is a core value at Waste Management. We want to make sure our 50,000 employees are operating safely. I know gentleman earlier talked about PPE. That's been a huge focus for Waste Management. Obviously, with the way that we have navigated our operations, half of our business really never changed. We are dedicated on safely and efficiently servicing our customers. That's about half of our employee base. We stay dedicated to making sure we provide a reliable service. The other half, obviously, we had to navigate pretty quickly to have our employees work from home. Obviously, a lot of our customer-facing employees work from home immediately. I think we navigated that very well. And I think, ultimately, it's made us look at our cost structure and how we operate our organization, whether it's SG&A, our go-to-market strategy for how we interact with our customers and also how we've become more operationally efficient, understanding how we can shrink our cost structure based on COVID. And lastly, I think as most people, our T&E has definitely gone down. We've realized we can much more efficiently manage our SG&A and optimize that appropriately.

You guys have done a great job growing the company to over $15 billion of revenue, $4.5 billion in EBITDA. What's -- maybe you can tease out what's your strategy in the near term. How do you -- where do you go from here?

I think strategically, we've got a couple of major opportunities ahead of us. Number one is the Advanced Disposal acquisition. That's a huge opportunity for Waste Management. We've already realized synergies in Q4. Obviously, that closed at the end of October. We're aggressively trying to make the best of that acquisition and putting the Advanced Disposal organization through the Waste Management way. And I think it's a great business. It fits with us culturally, and we have an opportunity to realize synergies and continue to use that as a platform for growth. I think as we look at 2021, we've started some route efficiencies already in -- as early as this month and into Q2. And it will be a balance of route efficiencies working the Waste Management way into the Advanced Disposal group and also realizing some SG&A synergies as well. So we're really excited about. That's a big part of it. I think the other part of it too is our commitment to technology advancements. We're working on a program you probably heard about customer service digitalization. That's really a massive investment for us to differentiate us all the way through the customer journey, whether that's a more easy and reliable front end. But most importantly, connect that into the operations through the entire customer journey and deliver that seamlessly on the operation. And that's a big focus for us in 2021 as well. But I think core disposal organic growth as well as residential optimization, those are big focuses for us. So as I summarize our growth plan for 2021, 2022, it's really the Advanced Disposal integration. It's our disciplined growth platform, primarily disposal on residential and customer service digitalization, which is really going to improve both our employee experience, our customer experience and I feel is really going to differentiate Waste Management.

Maybe we could walk through your businesses, end markets, lines of business, customer types. What are you seeing coming out of COVID regarding trends in price and volume? And maybe the longer-term expectations for those businesses?

I think for us, our guidance for 2021 is really -- if I look at organic growth for the organization, it's about 4%, 2.5% price, 1.5% volume. Obviously, this quarter coming into Q2 is going to be a huge growth component year-over-year. But we're committed to our disciplined growth. I think in 2020, we spent a lot of time understanding and partnering with our customers. And I think that has really propelled us to have a successful 2021 from a kind of a price volume standpoint moving forward. I don't know if Ed or Brent have anything to add there on the -- on some of the other lines of business besides our core collection business.

Yes. I would say, Tony, over the long haul, we mentioned this on our Investor Day a couple of years ago that we're looking for 4% to 6% organic revenue growth, and we're right in the middle of that going into 2021. I know I'll let Brent speak here in a second, but a big part of that's going to be what we're doing on the recycling side of the business, trying to differentiate ourselves from that side. Brent, do you want to add anything there?

Yes, sure. So on the -- coming out of COVID, one thing we found was recycling is really an essential service that we provide to our customers. And so if you think about the cardboard boxes that all these supplies are brought into the grocery stores, into the hospitals, those are primarily made from recycled material nowadays. And so one of the things we saw our in-market customers is to really say, hey, we need this supply to keep the grocery store shelf stock and to keep our supply chains moving. And so what we've seen on the recycling side, there's a slight increase in commodity values on a year-over-year basis. But one of the thing we're focused on is making sure that we're covering our processing fee first. And so we're less dependent on commodity volatility. And with this processing fee model, it's going to bring a little bit more stabilization in the recycling line of business, so we continue to invest further in this infrastructure.

Great. Maybe we've had a couple -- we had a company on earlier this morning talking about different aspects of sort of the -- how the industry is developing. Given the backdrop, what's going on in Waste Management right now and you're such a great business, but maybe some concerns that you're seeing is -- what are you seeing out there as far as your greatest concerns? And given this, how do you outpace the rest of the industry?

Well, I think if Jim was here, he would say, we've never been more bullish about our company. I feel like we're well positioned as we mentioned some of the differentiation values that we have. As we look at the landscape, I think we're definitely a recovery play. I think the risk we have is kind of how quickly and how robustly the economy recovers. But I think regardless, we're very well positioned. I know we've talked a lot about in the industry around PFAS, but that's not necessarily a risk. I think that's an opportunity for us as we're well positioned, and we're investing in viewing some technologies to help our customers manage through that -- the regulations. I know we talk a lot about regulations in our business. But I think regulations around the environment where I think Waste Management really has a strong suit based on how we operate our asset base and our ability to capitalize on regulations. And I think we've got the resources and expertise to navigate through those. And I think a more robust regulatory environment is somewhere we can definitely excel at as well. I don't know if, Brent, do you have -- see anything specifically in your business on the recycling side that is of a risk. But I think we're definitely well positioned. We navigated the storm of COVID and the economy. And I feel like with our asset base, our focus on our customers, our people and technology, I think we've got a bright future here at Waste Management.

Yes. Well, I agree with that. You touched on the advanced disposal and all the success you've had there. Maybe you could talk us about what your expectations are there going forward with the integration? And how are you tracking with what you were expecting before the acquisition?

Well, I think some of our senior leaders have also mentioned, I think the delay in the closing helped us even get tighter on our integration plan. As I look at how we're tracking, as I mentioned earlier, we've already realized synergies in Q4 of 2020, and we're on track, as we mentioned, the $50 million to $60 million in 2021, and some of those synergies will still bleed into 2022 as we look at some of the additional route efficiencies. And our ultimate goal is to make sure we maximize the value of this Advanced acquisition. It fits with us geographically, culturally. And we have an opportunity to improve the margins, get the operational efficiencies as we tuck-in those routes and also look for synergies on the SG&A side. So I feel like we're tracking very well. I think the team is very organized. We talk about weekly on our SLT calls. And I think we're going to have a great integration and confident what I'm seeing so far all the way through the customer side, the operations side and SG&A side.

A question from the audience, just what you mentioned earlier, Mike, about PFAS. Maybe do you -- are there any solutions that you have that you could talk about? Or maybe you could sort of going a little more depth on how are we going to deal with that issue?

Yes. I think the generation of PFAS is very vast. I mean if you look at kind of the way we look at potential PFAS in our leachate, that's one element. Really, our big focus is on the generation side and making sure that we are looking at technologies, and we're still in pilot phase in some of these technologies to understand how we manage it. Obviously, with our vast disposal network, both Subtitle D and Subtitle C. And I know there's a lot going on regulatory-wise as far as where PFAS is going to go and how it's going to be managed. But I feel like we've got the suite of services to manage PFAS, whether it's in our leachate all the way through our customer generation. And we've been managing that consistently whether that's with our larger customers throughout our M&I space. So again, this is still evolving, frankly. And I feel we've got some technologies that we're piloting that we feel can and add some value for treating PFAS. But we're not ready to really talk about those since they're still in pilot phase, frankly.

Sure. Of course. Maybe back over to your operationally and profitability. On a forward-looking basis, you're going to do probably about over $4 billion -- almost $4.5 billion or so of EBITDA, $1.8 billion of CapEx. Maybe how do you prioritize between return of capital you guys have, you return a lot to shareholders and M&A?

Yes. As I look at our free cash guidance for 2021, and Ed, you could jump in here, it's a little bit shy of $2 billion. I mean, majority of that, $975 million or so will be returned to our shareholders. We're going to focus on share repurchase, obviously, debt repayment. But for the most part, our reinvestment in capital is going to be on sustainable technologies and a lot of things that Brent has been working on and really focusing on our capital efficiency is going to be on ways we can differentiate Waste Management. Obviously, we've got a really strong fleet, a big investment in compressed natural gas, about 70% of our fleet is CNG. And a big focus is going to be on infrastructure that's going to help us drive our whole sustainability platform, which is also a huge part of where Waste Management, I think, differentiates from the rest of the pack as our investment and commitment to sustainability and the ESG framework that I think more and more investors are interested in, and that really drives around our purpose-driven brand and around sustainability. So I don't know, Brent or Ed, if you have anything to add there.

Yes. I'll comment on that. So we've spent, over the last few years, it's been about $100 million a year on new recycling technology. You may have heard we call like MRF of the Future, which is in Chicago, but we also have lot of state-of-the-art facilities that we've opened up. We've got about 4 new recycling facilities throughout the country that have opened in the last 12, 24 months. And one thing that we've seen with this is with this new technologies, we're able to cut out some of the labor costs and labor costs, as you know, have been increasing in a lot of these states and cities throughout the term. So when you look at that, we're essentially trading off a little bit of higher depreciation for a rising labor cost. And so because we're able to do that, it's helping make these facilities have a higher return than some of our older ones, if you will. And the other piece to it that benefits us along with those lines is the quality of material we're able to produce is a lot higher quality because it is positive sortation, essentially an intelligent sorting type system that we're developing with these newer facilities. And so it's really exciting on the recycling infrastructure, the amount of investments we'll do in the future as well to revamp some of our older single-stream facilities.

So one thing I just want to add there is that the midpoint of our guidance is around $2.3 billion. So we have a lot of cash that we're expecting to generate this year. As Mike mentioned that we're going to be spending some of that for dividends, but I expect what's left over, we'll do a little bit of debt repayment, but we're not going to need to do much. I know Devina wants us to be between 2.5 and 3x. So I suspect we'll get there just on the EBITDA growth and then maybe a little bit of debt repayment. But what's left over, we're really going to look at what's the best use of that cash. And it could be through share repurchases, which we've been doing. It could be through growth in recycling or growth in renewable natural gas projects on our landfills. So we're looking for high-value investments. One thing we didn't mention is that we expect to the low end of our typical M&A tuck-in acquisition range of $100 million to $200 million. So we'll spend a little bit there. And if other acquisitions come along, we'll have the cash to be able to do that as well. But I think it's going to be a well-balanced allocation of capital after we spend the money on the dividends.

And maybe shifting to sort of a CPI, I mean, the FED had some bullets they brought out yesterday and probably -- it's going to probably be some relatively higher CPI going forward. How does that affect your profitability? And what would that timing be like impacting your business?

It's a good question, Tony. I think for CPI, that increase is definitely a help for us. We've talked about 30%, 40% of our business is indexed to some type of CPI indicator. We've been trying to push a lot of our agreements to the CPI, water sewer and trash to understand and correlate a little bit more to what we do. But big picture, a higher CPI environment definitely helps us. And obviously, as we mentioned, being able to control our costs and what we've done on the operating margin side through COVID and just focused on our operating efficiencies I think will help improve that margin spread consistently. But overall, we think our CPI environment is positive thing for us. And our goal, obviously, is to make sure that we pass on the cost of our business to our customers the best we can and try to connect those with whether that's an index CPI or other open market pricing in contract negotiations. But overall, to answer your question, I think the CPI increase is a positive for Waste Management and our industry as well.

Brent, maybe you sort of touched on it before, but obviously, commodity values have improved on a year-over-year basis. Can you discuss how that affects your profitability with a processing fee implemented now? And how does it compare maybe to the rest of the industry? Are you guys -- are you different in some sense? Or is it -- maybe you could talk about that?

Yes, sure. I mean, so a few years back, we went and essentially changed some of our recycling contracts and the business model to be more reflective of a fee-for-service type model, and so we approached our customers and said, listen, the way it's been working on us depending on commodity values hasn't been fair. And so the fair way to look at this is if we have a processing fee that we'll charge our inbound customers, and then we'll make our margin between essentially the spread on what we actually are able to charge those customers through the processing fee and the actual processing fee that we incur. And so that's really going to determine the true success on the recycling business moving forward is that spread between those 2. Now where commodity values play -- get an impact is when values are low, then most of that fee, if you will, that burden will be placed on the inbound customer. When prices are high, then that kind of shifts to the outbound customer. And so essentially, when prices are higher than the processing fee charge, then there is some sort of share back program where Waste Management will incur additional profitability when prices are higher, but we share most of that back with that generating customer because they're paying the processing fee. And then when prices are lower, then that inbound customer is essentially paying a tip fee for their recycled materials. What we found is, when we talk to customers about this processing fee charge and we tell them how much capital we're willing to invest maybe in their municipality to make sure they have a recycling infrastructure and services going forward, then they completely understand that, hey, this is a good investment for their community to make sure that they can have sustainable recycling programs in years to come.

And Brent, how have customers, how have municipalities accepted those fees? Maybe what percent have you switched over to a processing fee? And have you seen pushback or are most accepting? Maybe you could sort of talk about that a little bit.

Yes. We started a few years back. And so we're probably about 75%, 80% through with most of our large customers at this point. We still have a few to go just because the contracts extending -- have been large. We've seen that a lot of the competitors have obviously followed in that processing fee model. And quite honestly, it's the only model that you can guarantee sustainable recycling profitability. Otherwise, you've seen and I think our customers have seen these folks offer some different model, and they've since gone out of business or haven't been able to perform the services that they signed up for. And so I do think that's a sustainable model moving forward to recover the processing fee. I think you'll see that throughout the country in years to come. And it's really -- if you think about it, it's really a fair model. Now the one thing we do try to help with our municipalities and those inbound customers is how they can improve the economics and it's looking at the materials that they accept in their stream, making sure that those materials have good end markets and they can create demand as well. So whether you're the federal government, whether you're local municipality or whether you're a local consumer, you can help the recycling markets and those prices by purchasing items that are made from recycled content and helping to increase that demand.

And switching maybe back to solid waste, Mike, Waste Management has been a leader and sort of the shift in this post-COVID -- in this COVID environment of municipalities and increasing pricing for what -- for the increase in volume. Could you maybe give us an update there where -- how that is going with municipal volumes?

Yes. I think this is one we've been focusing on for a while. And really, the residential line of the business, I think, as most know in the industry, is a labor-intensive, capital-intensive line of business. And ultimately, our goal is to improve the margins for this line of business. Obviously, COVID and the impacts of volume, the shock to the system, if you will, of all the commercial volume for folks that were working on came to the resident. We've had conversations, and that's been a real focus for us for the last 3 years that really accelerated over the last probably year or so. And ultimately, our goal is to improve the margin, as I mentioned. We're seeing nice margin expansion sequentially over the last several quarters. And it's been a big focus of us making sure that we are getting the appropriate return for the capital invested there. And the conversations, as you can imagine, just as Brent mentioned, they're going to take some time. There's contracts. It's really about sustainable program and understanding what the services we provide, we need to get paid for them. The volume has increased. Some contracts allow for volume adjustments. But really, it's a renegotiation of the services we perform. And ultimately, what we want to do is make sure we provide safe, reliable and efficient service to our customers and get paid for doing that. And ultimately, that's the goal is to get the return on the capital we invest in that line of business. And it's a great business for us. We just have to make sure that the appropriate returns are there. And that's really been the focus. Our team is dedicated. The conversation is not just with the customers and moving price. It's like how can we become more efficient, what are some of the investments in technology, customer experience that can improve the overall landscape and both the -- from an employee driver standpoint, our customer experience agents as well as the customers. And that's a big focus of the technology investments we're making across the company, but specifically, in residential, that's been a big focus for us on the front end, but also operationally be more efficient and serve our customers. But overall, it's going well and more to be had there, frankly, on moving the margins, and that's a big focus for us, really on a disciplined growth approach that we have as an organization.

And it would seem the amount of firepower you bring as far as capabilities that would be very helpful in these customers. I'm sure the residential customers would appreciate that and the vast recycling ability you have and all the other services you have is probably pretty beneficial.

Yes. And that's a good point. I think our suite of services, I mean, primarily, when we talk about residential, it's the MSW and recycling and obviously, Brent is on here, and we've made some significant investments in our communication and education of our customers about recycling right and with a lot of volume coming in from the households. Now it's a huge focus of Waste Management to educate our customers around how to recycle, how to do it right, making sure we can get the most environmentally and financially from the investments we've made in the technologies in this line of business. So the suite of services is one of the things we don't talk a lot about. Our Bagster, it's not a big line of business, but that really has skyrocketed this year with a lot of folks working from home. It's a great service. It's in between kind of your residential volume and the big roll off years, and we've seen significant growth there. It's not a big line of business for us, frankly. It's also an additional service that helps support customers as they start to do home projects.

I've seen a lot of those in my neighborhood. There's a lot of those around. Maybe we could switch to sort of talk about M&A and what you do with your capital. What is the pipeline looking right now? And sort of go through all the multiples and expectations and all that. I'd love to hear more about that.

Yes. I mean, Ed, you can jump in here quickly. But as we start to look at our traditional solid waste space, we've got our hands full with the Advanced acquisition. We're excited about it. And I think we're going to get some great synergies and help grow our company. The M&A space, obviously, won't be as robust as it was previously in 2020 with the Advanced acquisition. But Ed, I think you can jump in here on some of the pipeline elements of M&A. They're going to be a little bit more vast and more on the adjacent spaces versus the traditional solid waste of any size.

Yes. I think Mike is right to some extent here. We do have the whole Western Mississippi for solid waste-type tuck-in acquisitions, but they're going to be the smaller traditional-type M&A acquisitions, like we said, closer to the $100 million. Just like always, we're going to be disciplined in allocating that capital there, making sure we're getting the right returns for our shareholders. We expect to get 1 to 2 turns out of the purchase price from synergies when we do these transactions. They're pretty straight right down the middle of the fairway, and that's what we're going to look to do for the rest of this year.

And again, I realize you're swallowing a big animal right now with Advanced. But maybe just sellers' expectations as far as are they booking more or less because of the potential tax environment? Maybe just sort of what you're seeing as far as the pipeline?

I think it's really a relationship business when we do these acquisitions. So it's not necessarily -- you'll have some sellers that want to sell because of potential tax reform. And tax reform isn't even out there just yet, right? And other things, it really just comes down to building those long-term relationships with these sellers. A lot of them are customers of ours at the landfill. So we know them fairly well. And what's -- where they are in their life cycle? Do they have people they want to give their business to, right? Do they siblings that -- or children that want to take over the business? Or they just want to get out and kind of retire? So it's all kinds of different scenarios, and I don't think there's anything significantly changed over the last year. But if the economic outlook changes because of tax reform or some other changes, you can expect to see more people wanting to sell potentially.

Sure. And then maybe to finish it off on a sustainability note. Maybe sort of talk about what you're doing. You mentioned CNG vehicles. Maybe talk about the -- what is the future fleet going to look like? Is there a potential for -- I know one of your contemporaries is looking into like electricity. Maybe talk about some of the sustainability aspects of Waste Management.

Yes. Ed, and Brent, you can jump in here, but I think 2 things here. I mean, we've made investment in CNG. We feel like that's the appropriate investment for us for the duty cycle that we service our customers. We're obviously going to make sure we stay connected with advancements in the technology, whether that's electric or others. I think for us from a sustainability standpoint, environmental stewardship is what we do. I think where we see huge growth and have seen a element of opportunity for us is helping our larger customers meet their sustainability goals with our Waste Management sustainability services, the investments that we have made and will make in RNG, the recycling that Brent's leading has been amazing. If we look at the whole suite, I think our ultimate goal as stewards of the environment and the leader in the industry is to make sure we're leading with our customers and helping them meet their own sustainability goals. We're going to see probably a renewed regulatory environment with the new administration. Obviously, Mr. Michael Regan has come in, in the EPA, pretty aggressive, has a pretty staunch agenda, and we feel that we'll be able to navigate through that. But I think, ultimately, from a sustainability space, our goal is to really take leaps and bounds in sustainability, whether that's thought leadership, whether that's sustainability forum or how we provide services and really the entire element around people, planet and really the sustainability of our business. And I think we've got a really nice balanced portfolio to help serve our customers but also make sure we do that environmentally sound. And we feel like the sustainability and environmental landscape is really a bountiful opportunity for Waste Management based on our asset base and the services and the people that we have.

Gentlemen, Jim and your team have done a tremendous job at Waste Management. Thank you for -- I'm honored to have you participate today. Thank you for taking the time and look forward to hopefully -- I'd love to get all 3 of you next year in-person. Thanks, gents.

Yes. We would too. Thanks so much, Tony. It's great be here. Appreciate your time. Thank you.

Thank you.