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

Hello, everyone, and welcome to the KBCM Industrials & Basics Conference fireside chat with Waste Management. My name is Sean Eastman. I cover solid waste for KeyBanc, and I'm going to be your host for the discussion. We're joined today by newly minted Chief Sustainability Officer, Tara Hemmer; and by Mike Watson, Chief Customer Officer. Thank you both for connecting with us today. We really appreciate the time. I've got some questions prepared and investors are welcome to submit questions using the Q&A feature. I'd like to say just be mindful of the expertise we have with us today in terms of your questions. We've got about 30 minutes, so let's get into it. I guess it would be great to start high level. I mean, considering Waste Management's size and market positioning, I feel like there is a responsibility to sort of pave the way for change in the industry.

So within your respective roles in the organization, where do you see the most meaningful change for the industry coming over the next 3 to 5 years? And where do you see WM as being most meaningfully ahead of the curve on those trends? Love to hear from both of you on that. Maybe Tara to start?

Sure. Thank you so much, Sean, and happy to be here. And it's going to come as no surprise that my comments will be centered around sustainability. And here at Waste Management, we don't want to think of ourselves as an industry leader. We want to think of us as a -- ourselves as a sustainability leader in North America and in the world. And I like to say that the work we do each and every day makes living in cities and communities possible. If you think about what we do on behalf of society, the way that we move material from point A to point B and handle it responsibly, it's critical to everything that happens next. And when you think about where the industry is headed and where Waste Management is headed, certainly over the next 3 to 5 years, we see much more aggressive investment in recycling infrastructure within the circular economy and certainly the trends that we're seeing on decarbonization. And we think that Waste Management has a role to play in each of those elements. Our customers are looking for solutions to their waste needs and really rethinking what the things that are discarded, how they might have their next best life. One of the reasons why we've invested over the past 2 years over $200 million in recycling infrastructure, and we're continuing to make those investments. And at the same time, looking at ways to take our traditional businesses like landfills and take the energy that's generated within those landfills through biogas and convert that energy to renewable energy sources through our renewable natural gas platforms. And we're constantly looking for different ways to play in those spaces. So I certainly see the industry, and in particular, Waste Management, taking a leadership role in thinking through the circular economy and ensuring that those materials that are managed each and every day, that they find their next best home.

Very helpful. What about you, Mike?

Well, thanks, Sean. It's great to be here as well. Building on Tara's comment around technology and our customer differentiation, I think the next 3 to 5 years, I see the industry really developing more technology to differentiate itself from its peer group. And specifically for Waste Management, our investment in customer service digitalization, I think, has proven to our customers and to our operating structure that the investment in technology could be a differentiator, not only for growth but also for cost to serve. And that our customers are looking to engage with us in a much more digital platform. And that investment we've made over the last 2 or 3 years that are really accelerating now, I think, will pave the way not only from the customer interactions on the front end, but all the way through the operation and service delivery, whether that's container inventory management, routing, dispatching the like, or how we can improve the operation and the experience our drivers have on the street. So the whole continuum of digital investment, I think, is where we're really going to see some separation in our industry and also a big differentiator for Waste Management in the next 3 to 5 years.

Got it. So a lot of interesting stuff there. Hopefully, we can get back to all of those elements in more detail. But a couple of items I just want to hit in the interim is, firstly, pricing discipline. Clearly, it's been a bright spot in WM's recent financial performance, both at the landfill and residential pricing in particular. So could you explain to us what's enabled that? I mean is it cultural, is it technology enabled? Is it competitor behavior sort of supporting that? Could you sort of round that out for us?

Sure. We would agree definitely that pricing has been a bright spot for Waste Management, primarily on our commercial industrial line of business before the last couple of years. We are very demonstrative on making sure we had the appropriate cost recovery mechanisms for both residential and disposal, specifically, residential. As we all know, it's a very costly business, a lot of labor, capital. And we aligned on process and some technology and some customer analytics to make sure we were making the appropriate investments really driving the change needed in that line of business residentially. And our yield in Q1 doubled to over 4% for residential, which we had never seen before in quite some time. So I think our leadership there really focusing on the cost recovery and really where we can get a premium and also to match the investment we're making in that line of business. So I would say similar to disposal, again, trying to recover some of the inflationary elements of that business. It is a scarce asset that really is a differentiator for Waste Management. We wanted to make sure we had the appropriate pricing and pricing leadership that was required for that line of business. And again, our core price in the landfill line of business is over 3%. And these are things we haven't really caught our stride until the last couple of years. I think it's a real alignment of the people, the process and then supporting technology and analytics that have really driven that.

Okay. That's helpful. And this kind of segues into inflation, which is a big topic for the investment community these days. I mean, is inflation a concern? How do these big CPI prints impact the model? And how would you tie this inflation topic back into the pricing discussion?

Well, very similar to what I mentioned in the previous question, I think ultimately, our goal is to make sure that we could pass through any type of cost impacts we have through our line of business, specifically on the landfill side. Landfill liners, the additional costs associated with managing these facilities is important. It's a huge asset. It's a competitive advantage for us, and we need to push those pricing levers forward. About 40% of our business is indexed to some level of CPI or CPI-WST. So obviously, ultimately, we could pass through those specific measures through those pricing levers. But also we have to understand that we're in a cost recovery approach and also trying to identify where we can get price premium for the services we provide. And we've done that across the entire landscape, hence, our pricing leadership and results over the last several years, really.

So what would you say to investors concerned about inflation? Maybe the idea is that the pricing programs in place should keep you comfortably a spread above sort of inflation expectations going forward?

Yes. I think that's a fair statement. The other thing, too, is I think as we look at the way we can differentiate, that's the whole goal of what we're trying to do as a brand. And the services we provide is to drive a differentiation wedge from our peer group and separate ourselves from the industry, as Tara mentioned, around sustainability. And I think ultimately, we've proven that we can get the pricing we need. And that we'll be able to pass that through, and we've done that considerably. And I think as we move forward, thinking about the impacts that this industry has, some of them are kind of homogeneous across landscape, some are not. But for the most part, we've had the capability and leadership to drive pricing and overcome the inflationary cost pressures.

The other kind of positive takeaway from the first quarter was the nice downtick in churn. And I'd just be curious to hear what levers you have internally to keep that number trending in the right direction.

Yes. That was definitely a bright spot. Coming off of 2020, I think we really showed up as a brand for our customers when our customers needed it the most. We made adjustments in service levels. We were very accommodating for our small medium business customers, that was a big leadership message that we had. We provided a free month service for our customers that were recovering through the COVID. And I think that's really played an important lever in our retention. In addition to that, we made some adjustments in our sales organization where we shifted a lot more resources to the inside with a better coverage model. And we feel like better coverage models allowed an improved customer experience and engagement that has driven down defection. In addition, as I mentioned before, we invested in customer service digitalization, which has allowed our customers to self-serve and communicate at their channel of choice with Waste Management. And we feel that's also been an additional driver of reduced defection.

Got it. So I mean, both of you guys have been in the organization since the '90s, I believe. You've seen a few up cycles. Clearly, the business seems sort of positioned and poised for growth here. I mean how would you kind of characterize the tools or other resources at your disposal kind of headed into this up cycle that really influence the business' ability to capitalize on this growth coming kind of relative to the last couple that you've seen with the organization?

Well, given that we've both been with the company since the mid- to late '90s, I would say that one of the biggest differences is when we started with the company very much an analog-type business. And now we're really leveraging digital tools. And I think that if you think through what happened during the pandemic, that was a huge accelerant for us. We had plans underway, as Mike mentioned and we talked about during Investor Day, but in a lot of ways, the plans to further digitize and digitalize the customer experience accelerated. And you're seeing us leverage many of those tools, including our smart truck technology. These are all examples where we have deep insights into what's happening with our customers so that we can build broader solutions in the future. The other key piece I would say is our people-first commitment, and this is something that certainly has been amplified again over the last 2 years. But during COVID, the way that we took care of our employees so they can take care of their families and then ultimately our customers was a differentiator for us. We had a 40-hour guarantee. We did not lay off any of our frontline employees, and that's paying off for us on the back end here. When we have these labor pressures, we saw our turnover decline during the period, and it seems to be holding. So how we treat our people is definitely different and something that I know Mike and I are very proud of, as is the rest of the SLT. So the last thing I'll just comment on, if you think through how both Mike and I started in the mid-'90s, when we were solidly a trash company at the time. And if you look at the transition over the 20-plus years that we've been here, we moved from a trash company to a recycling company to a trash and recycling company that's working in the energy space to an organization now that's leveraging all 3 of those and then thinking through how do we make those customer connections to solve some of their biggest problems when it comes to what's happening in the world with decarbonization and with the energy transition. And so we're well positioned to capitalize on that in the future.

Yes. I think Tara summarized it well. I think the one thing I would add would be the balance of the revenue-generating portfolio, to kind of piggyback on what she's saying. We have opportunities and have seen great growth in our strategic business solutions or our national accounts. We see growth in our sustainability solutions on a consulting basis. We've seen growth on our SMB net churn, and the balance of our customer segments is very well in line. So we're not heavily weighted towards one sector or the other, which I think is a critical part to a solid business model, but also have the ability to kind of balance out the portfolio for continued growth. And we're seeing that happening here coming out of Q1 into Q2. And that growth is definitely accelerating, and we're seeing that across multiple lines of business. And I think as a leader in the industry around our people, I think that's where we can really see the growth happening as being able to attract and retain top talent through the return of the economy is something that we talk about every day, and that is a commitment we made from the top down through the tough parts of the pandemic even into the volume recoveries and around our people. And that's probably the biggest shift I've seen. We're much more asset-based operationally based. And the script really was flipped with Jim Fish's leadership around let's take care of our people, who take care of our customers and the shareholders will prevail. And that was -- that's really rang true through the toughest times of 2020.

Super helpful. And then I've got to ask this one. I mean the industry generally saw solid waste volumes recover kind of at an accelerated clip exiting the first quarter. I mean has that continued? And kind of underneath that, are you able to comment on what we're seeing from a seasonal uplift perspective going into the summer months?

Yes. Tara, you can jump in because you're connected on the operational side, but I would say that the seasonal uptick is almost muted because of the volume recovery. Usually, you have these kind of very seasonal elements of the spring. We still have some laggards regionally, whether that might be some of the provinces in Canada that are slower to open back up. But for the most part, the economic recovery, we're seeing in our service increases. As Tara mentioned, our smart truck technology is picking up opportunities for upgrades and service based on us capturing the [ overlies ] when we service our customers. Our e-commerce has really picked up specifically on the temporary roll-off side. We're seeing volume recover quite extensively in the majority of the lines of business. So I don't know if, Tara, if you have anything to add there.