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

Hi, everyone. Good morning. Michael Feniger, the environmental services analyst. Here with me is Tara, who is Waste Management's first Chief Sustainability Officer. It's basically impossible to had a sustainability conference and not have Waste Management here. It would be just genuine at best. So I really appreciate that Waste Management was able to make this work, and Tara, for you to be able to find some time in your schedule.

And maybe for us just to kick this off, this role, being the first Chief Sustainability Officer, I believe you stepped into this role this year. Just for the audience sake, maybe you can kind of help us understand your role within the company. Maybe just give a background first of how long you've been at Waste Management. And Waste Management, a massive company, we're talking about $17 billion, $18 billion of revenue annually. Any way to bracket out what you would consider the sustainability business lines? How big is it? And then we can maybe dive into the outlook around those areas.

Thank you so much, Michael, and thank you for that introduction. And as you mentioned, Waste Management is at the forefront of the sustainability space. I tell folks internally and externally, we are a sustainability company. That's at the heart of who we are. And also, if you really think about it, the work that we do each and every day, we make living in cities and communities possible. So WM, we've been on this journey for a while. I've been with the company over 22 years, and we've certainly seen an evolution of the industry as well as the company. And certainly, today, I think we're squarely at the intersection of so many different trends in the sustainability space. Regarding the role, you're right, I've been in the role officially since July 1, so a pretty short amount of time. But I think it's important to frame the distinction of this Chief Sustainability Officer role. And it's really a dual role if you think about it. I have the portions of what typical Chief Sustainability Officers have related to recording and ensuring that we have the right internal frameworks related to our operations. But I think most important in discussing with Jim Fish, the vision for the role, this really is about taking sustainability and turning it into a growth platform for WM. So I have specific sustainability lines of business underneath me, which include recycling, organics, renewable energy and other elements like that, that are squarely in the sustainability space. Regarding bracketing it, you mentioned $17 billion to $18 billion company from a revenue perspective. And if you look at the revenues in recycling, organics and renewable energy, around $2.5 billion and an area that's clearly growing, and we're expecting that it will grow at a more rapid pace than the rest of the business.

That's great to hear. And I definitely look forward to diving into that $2.5 billion in the growth rate. I guess part of that is recycling. You're clearly the country's biggest recycler. I believe the last sustainability report I saw, the company set a new record with over 15.5 million tons of materials processed. I think it was in 2019. That's impressive in a backdrop where -- and we've written on this that the national recycling rate has actually plateaued or gone down. So maybe you could kind of provide some context on how Waste Management's recycling business is really emerging from this downturn in recycling and how it now appears to be a tailwind for the business going forward.

Well, there's 2 key points here. The first is we really look at this from a customer perspective. So our customers clearly want recycling as a service, and that is something that we want to continue to deliver to our customers and expand, and we certainly see those trends continuing to grow. If you look at what customers are demanding, they're demanding those sustainable service offerings. So it was clear to us that we wanted to make sure that we had a viable business model moving forward. So about 3 to 4 years ago, we marched down the path to make sure that we fixed the business model, and we fixed the business model in a way where we got paid for the service first and really a fee-for-service model, and we've been very successful in that evolution. And the second key piece was to make very targeted investments in recycling facilities to do 2 things: one, to innovate and really reduce our cost to serve, and that includes labor costs, and we've been successful in doing that. If you look at our labor costs, we've been able to reduce those at our next-gen MRFs by over 35%. And then just as important, we've been able to be nimble about pulling out different commodity types. As we see markets for those commodity types of developing, we're certainly seeing that in the plastic space. A great example is polypropylene, your yogurt containers, which a year or 2 ago didn't really have a market. And today, we've increased our capture by almost 40%. And these are commodities that have very high value. It's one of the reasons why the second quarter of 2021, we had our best really results ever in recycling, and we're expecting that to continue.

That's great to hear. I mean, if I could just push a little bit on that. I understood back, back, back last cycle, that Waste Management's recycling business was maybe a high-teens margin business during the downturn, like you said 3 or 4 years ago. It might have even been close to breakeven at one point. And like you said, now it's clearly this tailwind. Is there any way you can help us on that profitability of your recycling business? I know it's a little bit different with this fee for service. But any way for us to gauge like where the business is now versus where it was last peak? And can we see margins go well above prior peak based on some of the things you guys are doing there today?

Yes. We're continuing to expand margin. And I think a really important point is we're posting these results despite the fact that commodity prices, while they're up, they're not where they were in 2017. So I think that speaks to the efforts that we've undertaken to stabilize the business and do that really not completely independent of commodity prices, but really to mitigate our commodity price risk. And so what we're seeing, we're able to expand margin by doing that. And that is something that we're expecting to see moving forward. The other thing I want to point out is that from a return on invested capital perspective, Recycling is our second highest ROIC business in the company. And so that's one of the reasons why we're continuing to reinvest in the business, and you're seeing those reinvestments pay off based on the profitability that we're posting.

Well, based on that answer, I'd love to jump into a question that I get quite a bit, is investors sometimes ask, if we see a shift away from landfills or reduction waste or increase in reuse of materials, is this a risk to Waste Management's business model? You just flagged actually that recycling can be your second highest return on invested capital business line. So I guess since you just brought that up, I'd love to bring this out -- this question to you on the forefront is, how should investors view the shift away from landfills over time, reduction in waste, increase reuse materials, but you also being the biggest landfill operator, how should we think about that in the context of Waste Management? Is it a landfill business? Is it more transportation logistics? How do you view these risks and opportunities kind of going forward?

I think the way that we view it internally, we obviously are a premier world-class logistics company, but we also are a materials management company. And I use those 2 words intentionally because at the end of the day, what we're trying to do is partner with our customers to solve the issues for the materials that they generate and manage. And in some cases, that means it's going to go to a recycling facility; in some cases, an organic's facility; in other cases, we do metals recycling. And in other cases, landfilling is going to be the best option based on what we have today. But it is one of the reasons why we continue to look at alternatives related to landfilling and taking what we have at our landfills and making sure that we have opportunities to close the loop. That's one of the reasons why we've been heavily investing in renewable natural gas. And I'm sure we're going to talk about that in a little bit. But at the end of the day, when you look at our national accounts business, which is a great example of what we've been able to do here, we've really taken some data and analytics capabilities based on what our customers are seeking and been able to grow that business based on our sustainability platforms pretty aggressively over the last several years. And that really speaks to helping our customers figure out which [indiscernible]. So that's why we're investing in landfills, but we're also aggressively investing in these other spaces. And we've increased our recycling investment. It used to be about $100 million per year. This year, we're on track to invest $150 million. And really, by 2023, 95% of our recycling facilities will be next-gen recycling facilities. So we're actively playing in the transition.

That was great color. I think you said -- I remember in your sustainability report that the last 2 years, it's been $100 million in infrastructure recycling technology investments. You said it's clearly looking like a step-up with $150 million. I think you just said 95% of your MRFs by 2023. Can you just give us a little bit more color on your next-gen MRFs? I believe there's 2 "MRFs of the Future." We had, earlier today, AMP Robotics talking about how a lot of automation is helping them really take out that labor cost at some of the MRFs that they've been brought into. I'm curious if you can kind of just give us some frame of reference of how just technology in itself has really changed some of the economics on the cost contamination sorting side, because Waste Management does have some ambitious sustainability targets around contamination rates and recycling.

Sure. So the way we've been thinking about it is there are different asset needs within the recycling network. So we have what was our first one, our Chicago MRF of the Future, which is one of our larger facilities, but then we have midsized and smaller ones. So midsize is what we just deployed in Salt Lake City and then a smaller facility like Raleigh. And all of these include really innovative next-gen technology. So think optical sorters. And in the past, you might have had 1 or 2 optical sorters in a MRF. Now in some cases, we might have close to 20. And all of those are looking for different commodity types. and the great thing about that technology is you can be nimble and you can plug in different commodity types for that optical sorter to look for based on demand for those products. And certainly, that's going to evolve based on what's happening with sustainable packaging, and we'll be able to adapt to that.

Makes sense. And if I can ask, we had earlier today, Biffa, it's a U.K. waste collection and recycling operator. Obviously, I would say Europe in general is a little bit more progressive in terms of legislation in that area. I'm curious where you're sitting. What are you observing today? Are there any states that are kind of leading the way providing a blueprint going forward here? Do you see any chance of federal programs that can move the needle, minimum recycling content laws to be a catalyst? Anything we should be keeping our eye on really in the next 12 to 24 months that could really be underpinning more recycling or sustainability just from a legislative perspective?

Well, Michael, you're absolutely right. If you look at our government affairs and public affairs teams, they have had to be on their toes because there's been no shortage of state and federal legislation that is either being proposed or enacted. So I'll start first with some of the things that we're seeing on a minimum content related to packaging because we really do believe that, that is a good catalyst to drive demand. And if you have strong demand for recycled content, that will hold markets up and it will help continue [indiscernible] recycling facilities. We're seeing some of that in New Jersey and on the West Coast, and we're tracking that absolutely. Some of the other things that we're seeing with extended producer responsibility, we've seen some of that legislation enacted by some states, most recently, Maine, Oregon. California has elements of that and certainly seeing that on a state-by-state basis, and we're actively tracking it and trying to help shape in some circumstances to make sure that the investment in recycling by the private sector is recognized. The other key piece at the federal level is the infrastructure act and the RECYCLE Act. There are elements of the RECYCLE Act that were pulled into the infrastructure act, which really relate to educating communities and providing investment communities to educate their constituents on how to recycle right. We don't necessarily see today that there would be federal legislation passed related in any EPR framework. But of course, we're tracking that as things evolve.

Makes sense. And look, it's clear based on the numbers you even provided within your own CapEx. So Waste Management is investing and making strides to improve the upstream portion of recycling ecosystem. The collection, contamination, sorting capabilities, lower processing costs, that's all helpful. I guess what I want to ask is, what are still the pain points for us to help close the loop? I remember statistic a few years ago that 60% of the materials at MRFs did not have economic value. Has that figure improved, changed and all? And just lastly, could we see more partnerships with you guys and CPG companies to help really drive that value?

Yes. That 60% stat is a great example of a time period where there wasn't a whole lot of demand for recycled content material. And that's completely shifted. And it's completely shifted, not just on the fiber side, but on the nonfiber side, the plastic side. So a couple of key stats there. Plastics for us represents about 5% of what goes through our material recovery facilities, but it represents today 30% of the revenue and, in some cases, 100% of the conversation based on what's happening in the plastics space. So we're certainly looking for solutions, and we have some great examples. I'll give you 2. One is we partnered with Cascade on the EcoCart program where we use post-consumer recycled content to build our carts or toters that we put out at residential businesses. And then a more recent example, which I think is a fantastic one, imagine one of our WM employees coming to your home and picking up your recyclables. And that PET bottle, that water bottle that you put in your toter goes to one of our recycling facilities and goes to a company called Unifi that turns that into a uniform that, that very employee is wearing. So great example of strategic partnerships and strategic partnerships with those entities that are drawing the demand on the recycle content side.

That makes sense. I mean there's only so much Waste Management can do. I guess I'm still a little scratching my head. I'm not -- we're not seeing more partnerships with the even bigger CPG companies yet. Do you think that's something that happens down the road, Tara? Or do you think legislation is -- or ESG is really what's going to push that even further along?

Well, I would say, like you mentioned, all of the CPG companies have aggressive sustainability goals, and we're working with those CPG companies to look at what are your broader goals in the circular economy and how can we play in that space. In many instances, we are selling our material that we collect to those entities and really working on the supply side. Because the materials out there, we know that plastics recycling rates, in particular, are low, and there are opportunities for all of us to figure out ways to capture more material, whether it be the curb or a commercial and industrial location, which often gets overlooked.

That makes sense, Tara. And look, tomorrow is actually a bigger day focusing on landfill gas, yet you guys are the biggest landfill operators, and I have you here, so I have to kind of ask you about this. Landfills, it's a dirty word, but there's a lot going on right now in terms of closing the loop, converting landfill gas to a renewable energy source. Maybe you can kind of flesh that out a little bit for people who are new to this concept. Talk about your pipeline. Why are you accelerating projects there today? Any way you can kind of size that overall business? Because I think it's moving the needle right now in earnings in Q2. What's kind of the catalyst to really drive this even further for us, just landfill gas to renewable market?

So for those that don't know WM's journey in this space, we've been playing in the renewable energy space for over 20 years. We have over 125 renewable energy projects, which were primarily renew -- or landfill gas to electricity. And about 3 years ago, we really saw an opportunity in the RNG space based on what was happening from a regulatory framework perspective and then some broader sustainability trends. So we already had about 13 third-party facilities where we had partnerships with previously, where RNG plants were built on our landfills. And then we've developed -- there was 1 in the pipeline and we developed 3 new ones ourselves. And these have a phenomenal payback. We've demonstrated that over the last several years now. Of course, there's a framework, a regulatory framework that they rely upon, the renewable portfolio standard and a lot of legislation around RINs and RIN programs. But when we look at the outlook, we absolutely see this as a growth play for us. We have a pipeline between 15 and 20 landfills where we could build new plants, and we're looking at whether or not new -- do those ourselves, whether or not there are strategic partnerships in play. And we definitely feel like, going back to landfills, this is a great opportunity for us to close the loop, capture more landfill gas through renewable sources. And WM is best positioned because we have the largest fleet of natural gas vehicles where we can close the loop and generate the RIN, the monetary engine, that sort of fuels the renewable natural gas space in lands.

And do you feel like the -- you mentioned 125, most of these landfill projects are landfill gas to electricity. From my understanding, these projects -- electricity prices have dropped, Tara. Like there's a chance that actually a lot of these projects could, over time, just easily be converted to landfill gas to RNG to renewable natural gas, which, as you mentioned, is very profitable today based on a lot of the credit system and where these credits are trading. So is there any way for us to understand like how big, how untapped potential on your landfill base is the addressable market for you guys just based on your landfills today that would qualify for like -- for the RNG market?

Yes, you're absolutely right. I mean we're looking at those opportunities within 125 that have renewable electricity plants and whether or not it makes sense to really convert. And as you can imagine, it's easier to do this where you have a larger amount of gas out of landfill versus a smaller amount of gas. And the sweet spot for us is around 5,000 SCFM or that's the amount of gas that gets generated for a minute. So we're looking at that portfolio and trying to prioritize our investments based on return ultimately and then also examining whether or not there might be strategic partnerships on some of the other assets that we have in play.

Makes sense, Tara. And look, you've mentioned the renewable standard. And for people who are new to understanding this, we're going to talk about this a lot tomorrow. But the term being thrown around is RIN or RIN 3. If you have your Bloomberg screen, type in RIN 3 commodity. You'll see how it's gone up a lot. It's more than doubled, and it's making these projects very valuable. I guess when you're evaluating these projects, Tara, and this takes a long time, these projects to get going. I guess, is there any catalyst in terms of regulatory that we should be monitoring with the EPA or with buy-in that will be driving more RNG market, that would be even more supportive of this industry? And the reason why I bring that up, Tara, is because you only have to look back 3 years ago when RIN prices were very low, this wasn't really a topic of conversation. So I'm just trying to get a gauge of how you guys view that in terms of the value of these credits and where you think regulation might be going to really justify these projects going forward.

I think what's interesting, certainly, we need to look at the government programs and understand where the government programs are headed. But I think what we're also seeing is really the private sector. There's also a key draw for renewable fuel and renewable power. And great examples of that, we've had some larger potential customers contact us and say, "We just want to buy it outright, and we don't necessarily want to tie it back through a RIN. We want to use it to power our facilities, and we'll compensate you based on that." So there's a demand for renewable natural gas outside of the transportation pathway. And I think you're also seeing that there are other programs, quite frankly, in other countries that we could tap into. So we're going to continue to watch the regulatory framework and what happens with policy, certainly within the existing administration and then also within future administrations to ensure that the legislative framework is there.

Yes. And everyone who's sending me questions, we're getting a ton of questions right now, as you can imagine, Tara, on landfill gas, in the EPA, the credit system states. I promised a lot of this will be covered tomorrow with [ Julien's ] team. We have landfill operators, but also just a lot of developers and industry experts that really have more visibility on that to help us on that and could address your questions. I want to ask for my last question with Tara is, look, Waste Management is likely to report a record earnings this year, yet it kind of feels like the business lines that you're responsible for are at this inflection point, recycling, renewables. It's starting to move the needle. Do you have any sense of the incremental EBITDA contribution from the sustainability lines to the business maybe in 2019, 2020? And how we should think about it over the next few years? Is there any chance you think that the company, if it gets to a certain size, Tara, that it could actually break it out as just a separate business unit for investors to follow and maybe value it differently than the solid waste business?

So listen, I think what's important is to really go back to those external trends. Because if you go back to the external trends, and there are 2 key trends and we're at the epicenter of both, and it's the circular economy and it's what's happening with decarbonizing the world and, of course, North America, where we are located. And so we definitely feel like the sustainability lines of business that we have today and that we might evolve in the future are going to increasingly play a stronger role in how we partner with our customers and how we grow the company. And so that's where you're seeing us prioritize some of our investments, certainly, our investments in recycling and then our investments in renewable natural gas, and I think that's something that you're going to see continue. Innovation is rapidly helping our industry reframe where we can head with sustainability and I'm very, very excited to work with the entire WM team on this journey.

Perfect. I know we went a little over. Everyone with questions, feel free to send it over to me. I'll put you in touch with Ed and the team to clarify. Tara, thank you for your time and making yourself available on short notice for this conference. We really appreciate it.

Michael, thank you so much. It was a pleasure.

Thanks, everyone, and stay tuned. The next few sessions coming up at the conference are really around these SPACs and emerging companies around, as even Tara mentioned, what you're kind of seeing around the plastic ecosystem. So stay tuned, and we'll be back shortly. Thank you, everyone.