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

Okay. Let's go ahead and get started with the next presentation. So for those of you that may not know me, I'm Tyler Brown. I'm the Senior Analyst here at Ray J. I cover both the environmental services sector as well as the transportation sector. So this morning, still morning, I'm really excited to have WM joining us. Presenting today is the company's CEO, Jim Fish; and the company's Chief Digital Officer, Nikolaj Sjoqvist. Pretty good. So I want you guys to all take a moment and notice I called them WM, not Waste Management, that was a bit by design. This is something that we're going to talk about here in a minute, but there was a little bit of a name change and really it's more WM as opposed to Waste Management going forward. So I think we all know Waste Management. Many of us may even get picked up on Tuesday by Waste Management, the largest solid waste company in North America, has a great disposal network, probably the strongest in the industry. I don't think we have any slides, but I do want to, Jim, just maybe set the stage, talk a little bit about WM and really what you do, who you are and then we'll kind of jump into an interactive Q&A. If anybody has any questions, obviously, raise your hand throughout the Q&A. But I'll turn it over to Jim, and then we'll kind of dive in.

Okay. Thanks, Tyler. Good morning. I guess just to give you -- for those of you who don't have as much familiarity with the company, we are the biggest solid waste company in North America. We're the biggest trash and recycling company in North America. And we will always be that. The transition to WM, which I know we'll talk a bit more about, is really kind of a reflection of the change to focus on our efforts around sustainability. It was interesting a couple of years ago, I was at a National Geographic Conference and was asked, "So why do you consider yourself sustainable when you're the biggest landfill company in North America?" And my response was, "Well, we're also the biggest recycler in North America." By the way, how much waste do you think of the 110 million tons a year that we take into our landfills. How much do you think WM generates? And the answer is really 0. It all -- it's all of us, it's businesses. It's all we do is take it and do something productive with it. And so part of the transition to WM was that it's a reflection of this sustainability move for us that we think is a huge differentiator for us. We already have the network, the assets where we can talk a bit, Tyler, about the investments we're making in recycling. But I'm excited to be here. It's been 3 years since I've been here, I guess, maybe 4 years, it's 2019. So 3 years since I've been here. But I'm excited about it. And I'm excited about -- I've said recently, I'm very bullish on this company, and obviously, I'm biased, but I'm also very bullish on it for a lot of reasons that I think others are bullish on it, which we can talk through.

Well, let's maybe just start again a little bit with the name change at a deeper level. And again, kind of maybe just give a little bit more context about, again, you moved from Waste Management to WM. I'm assuming you're trying to signal to the marketplace, to The Street, to whoever, that there's kind of a change in kind of your maybe call it, your go-to-market strategy or what you really want to be known for. So maybe you could talk about that just a bit.

Well, really, it's a branding change. It's not -- we didn't change the incorporated name. I mean at the top of the 10-K, it will still say Waste Management. So it's really a branding change. It's not that dissimilar from what I see on your screen here, UPS. I mean, they changed their name from United Parcel Service, obviously, IBM. There's a lot of companies that have done this and for various reasons. For ours, it may -- at our Sustainability Forum that's linked to our golf tournament a couple of years ago, someone asked, "So why do you have waste in your name, if you want to talk about sustainability, if you want to be synonymous with sustainability?" And it was a good question. And I think that the golf tournament has actually helped promote the brand to a point where we're able to make the change. Not everybody can make a change like that. I mean you have to have a brand that can -- that can not to use the term sustained but can sustain that change. And I think that the other thing is that we tended to get confused at times. I got a call yesterday from a customer who said, you guys. This guy is a Senior VP with a company out on the West Coast, "You guys haven't followed on the job." And so I said look, sorry about that, let me connect you with the Area Vice President. Well, it turns out it was another waste company that just had waste in their name. And so part of that confusion goes away. But first and foremost, it's really a brand change that helps reflect this transformation taking place within the company.

So I do want to talk a little bit about the announcement from last quarter because it was large, it was interesting. I'm going to call it around this kind of green CapEx. So I think you announced about $1.5 billion capital program that's really tied into both the recycling and to the RNG market. So first off, maybe we can bifurcate. So of the $1.5 billion, kind of how much of it is going to recycling? How much of it is into RNG? We're going to set the RNG to the side for a moment. Maybe we'll just start with recycling, but can you talk about how big that investment is? And then we'll get into about some specifics about it.

So it's pretty close to half and half. I mean it may not be exactly down the middle, but it's pretty close to half and half. And as we think about recycling, a few of you may have visited our plants. If not, they're basically a processing plant. We process 10 million-ish tons, maybe a little bit less. And then we, through our brokerage business, handle another 5 million to 6 million. So in total, we're touching in some way, shape or form about 15 million tons a year of recyclables. We started a couple of years ago to transition away from a more labor-intensive process. So imagine a plant that is probably 20,000 tons a month of material coming in. That plant probably employs and this is kind of today's plant, not tomorrow's plant, employs 150 people. So we took a plant in Chicago and completely transitioned that to a much more mechanized form of sorting, so optical sorters. And a typical plant might have one optical sorter. This plant has 14 optical sorters. So the capital cost of the plant is higher, but we reduced the labor cost at that plant by somewhere in the neighborhood of 40% to 50% of that plant specifically. And we believe that at all plants, we can reduce somewhere between 30% and 40% of the labor cost, and at the same time, produce a better quality material in the back end. We've now done it to 3 plants. Chicago is the one that I just described, Salt Lake City, Raleigh-Durham. And so Tyler, this acceleration is, at least in the first year, is largely going to be focused on retooling, rebuilding of plants. We do have some new plants in there in underserved areas. And so there is a combination in that first and second year of kind of rebuilds plus new, but we've weighted it towards the rebuilds because we know exactly what the payback is there, and the payback is excellent with the 30% to 40% reduction in labor. Another common theme that you heard on the earnings call was that we're making a strong effort to become less labor-dependent. So if you -- we don't really talk about things like revenue per employee. But we are a very labor-dependent business, 50,000 employees, 38,000, 40,000 of those employees are line employees, they're drivers, they're sorters, they're helpers, they're CSRs, they're hourly employees. Reducing the labor dependency is an important aspect of our Go Forward strategy. I talked about 5,000 to 7,000 jobs. Nikolaj can talk about what we're doing with complete automation of our collection operations and that's through his team, and that will be a significant change that helps reduce labor dependency. But in today's world, and you may have heard me on earnings calls talk about my daughter, my 18-year-old daughter who said, "Nobody Dad, nobody in my class is talking about driving a truck." Everybody's talking about working for a gaming company or going to college or nobody is talking about graduating from high school and then driving a truck. And so that generation is maybe not as interested in some of these trade jobs as my generation or my dad's generation. Therefore, we need to reduce labor dependency. And that's a big part of, not only the recycling business, where we're talking about 30% to 40% reduction in labor, but in collection, in disposal, in corporate roles, 5,000 to 7,000, I think, is very achievable.

So let's pivot, since we're on the subject. So can you talk about, of the 5 to 7, exactly where does that come from? Is it half and half between, call it, recycling and maybe automated residential? Or how does that kind of break down?

It's probably 4, 5, 6 different buckets. I mean, residential is shifting from rear load to ASL, is one. We have 2,800, so call it, 3,000 rear load trucks, the truck that picked up your -- probably your parents, neighborhood. And that truck still has 1 helper, and in some cases, 2 helpers on the back. It's not the most efficient truck from a productivity standpoint. It's very -- it's a cheap truck from a capital standpoint, but it's not a great truck from a safety perspective. Unfortunately, we've had -- we've had people killed behind those trucks, when somebody is texting and runs into the back of the truck. If we have a helper back there, it's typically not good. So from a safety standpoint, it is 70% of our injuries take place in the residential line of business, and the large majority of those take place in the rear load -- on the rear load truck because you have somebody outside of the truck, and that's the most dangerous place. So call it 3,000 helpers that can ultimately come off those trucks. The only challenge there is you have to talk to these municipalities and convince them that everything has to go on the cart. Not a difficult conversation if you're in California, they're already all converted or if you're in Arizona, in my old area, I used to be an Area Vice President in Pennsylvania, a little tougher conversation there, but we think it's very doable. So there's -- that's certainly one big bucket. Recycling, which we just talked about is another big bucket. As we talk about some of these other positions that Nikolaj can focus on dispatch and route analyst. We have, I don't know, 800 maybe, 800 dispatchers and route analysts that are busy every day routing trucks. And so Nikolaj's team is pulling together and I don't want to kind of steal his thunder, but he can talk about it more than I can. But that's another big area where we can pull jobs out. If we think about customer service, part of what we've talked about in the past with customer service digitalization is giving us the ability to, we fully automated the customer setup last year, which took out, what, 300 jobs maybe, 200 jobs.

I think it was about 150.

150 jobs, right. I doubled it just to make it sound better, but 150 jobs. So -- but that customer service digitalization gives us the ability to fully automate that experience. A lot of the calls we take, I think, about 14 million calls a year into our call centers, and many of those calls are fully automatable. Somebody calls and wants to check the status of a payment, somebody wants to check the whereabouts of their truck. All of those are -- we've automated. And so now this year, we're starting to transition those customers, the way the airlines did years ago. I mean you used to call and make an airline make a reservation. Nobody calls an airline anymore. You -- unless you're traveling internationally, but if you're traveling domestically, you just go onto the website and book your own ticket and it's simple. That's the direction we're going pretty quickly. So that's a big bucket as well. Even jobs, we've just -- we talked about spending a fair amount on big systems, HR systems and finance systems. And so we told our Board last week that we've eliminated 40% of all manual journal entries. That should transition into a reduction of approximately 40% of our accountants who are doing that. So there's a bunch of big categories, all those add up to kind of somewhere in the neighborhood of 4,000, 5,000 jobs. And then to get you to 7,000 jobs maybe more, you have this productivity pickup. So when you transition from rear load to ASL, there is -- we know that because we've done it. We've done -- we've had a lot of transitions. There's a 15% to 20% pickup in productivity when you go from a rear load to an ASL because an ASL is just picking up and moving on. A rear load has a helper on the back. In some cases, we have rear load that a guy actually gets out of the truck, walks around, throws the can in the back, walks back around gets in the truck and goes and drive some other 50 feet. That is obviously the least productive. But there are about 5 or 6 buckets, Tyler, that we think add up to 5,000 to 7,000.

So -- I'm not the best at math, but this seems fairly consequential. I mean I think on the call, you had talked about maybe these aren't $100,000 type jobs, but they're still fully loaded probably like $75,000 job. So I don't know if my math is right, but something on the order of maybe $0.5 billion. I mean, this is a pretty big opportunity. And I assume that this is something that phases in over a 2- to 5-year horizon. This isn't something that's just...

We've kind of said 3 to 4.

Yes.

I actually been surprised that there was -- I asked this morning. I said how many calls do you get after the earnings call asking you about the 5,000 to 7,000 jobs, they said basically not. I mean everybody asked about RNG, everybody asked about recycling. Nobody asked about that. And that was a significant -- maybe the reason nobody is asking is I'll believe it when I see it. But honestly, if you think about those transitions, that's not a huge stress to say we're going to take 3,000 or 2,000 helpers off the back of a truck. There's no technology. I don't need this guy to do that. That's just buying a different type of truck. And there's -- and convincing the municipality to shift to a cart away from a pickup everything contract. And if I can, I take one head off of the truck, and I become 15% to 20% more efficient with the drivers. So I -- in theory we can take 15% to 20% of the drivers out, but we really have had no questions on it. It is a -- by the way, some of our drivers are average driver or entry-level driver now in Houston, Texas, he is making $80,000. Entry level in the Bay Area is making 6 figures. I mean it's -- so -- and yet we can't hire, we can hire an MBA out of a kind of a second-tier school to work for Devina and making 55.

Yes.

Tyler, I'd say there is opportunity beyond what we've just talked about as well without getting into a lot of specifics. Jim mentioned some of the work we're doing on sort of the optimization and the automation side of routing. I'll give you an example to kind of bring it to life. We've known for quite a while, and we've had an independent third party come back and assess this last year that we've got the best routing algorithms commercially available. And by the way, we've built them ourselves. So our ability to route a truck across a series of stops is better than anything you could buy off sort of the shelf in the marketplace today. It was surprising when we learned this, but we've known this for a little while. The trouble is that creating an actual route used to be a fairly laborious process. It would be about 6 weeks, not just running the technology, but by the time you instill the manual process change, got people to adopt it. What we're working on right now, and we're going to be piloting this thing in April and then scaling it throughout the year and the roll-off line of business is fully automating the creation of these routes. And that is meaning that for every next day, we will create through a series of pretty complicated algorithms and put together that optimal route and feed it to the OBU, the onboard unit on the truck to route the driver. That's a very big deal because the amount of math that you would need to do as a human being to take a baseline sort of route and adjust it, and ultimately come up with the ideal answer is absolutely incredible. A human being can't do it. I'll give you an example. The average dispatcher at WM is probably dispatching about 100 tickets or 100 customers a day across a series of routes. If you look at -- and by the way, you need to know about 70 things about each of those customer service stops to be able to ultimately do the math that most efficiently routes the truck. To be able to put all this together, you need to be doing quintillion calculations to basically optimize those 100 stops that's 18 0s.

I said that on the earnings. I said 17 0s not [ 18 ].

That's right.

It's only one.

And so a human being can't do that, now what we're gearing up to and we're running a conference room pilot right now. So limited scale, behind closed doors. We've already taken several days with the routes from last year run it through the algorithm compared to what we actually achieved last year, which is, again, there was a baseline with a lot of manual intervention to what we are now able to do through this algorithm. I won't share the numbers with you because they are -- we are still in the process of validating and improving, but suffice to say, the impact potential is quite incredible. And that's just in the roll-off line of business. When you start expanding this to other lines of business like the residential line of business, the commercial line of business, there's a tremendous amount of impact to be had. And that goes even beyond negating the effects of labor that we're facing right now. You're talking about efficiency gains and so forth. So there's a lot of potential.

And the only part of that in terms of the job savings that we've really even discussed was that dispatcher role and route analysts. We have not talked about the fact that when you do the math, you are so much more productive. And so what's the efficiency pickup that then enables us to not have to -- by the way, this -- all of these jobs are high-turnover jobs. So there's not a rift that's going to take place here. I mean if we think about CSRs, our turnover for our CSRs, just for that position for 2021 was 75%. So when we take CSRs out in 2022, we're planning on taking a pretty significant number out in 2022. We don't have to pay anybody. We just use attrition. Those helpers on the back of the truck, 48% turnover for helpers. I mean you can imagine who wants to be a helper on the back of a trash truck. The sorter that we're taking out through the automation of these plants is 47% turnover. And then you get down to drivers, and that's down in the 20s. But still, as we take that -- those positions out as we become more productive, we don't need 21,000, 22,000 drivers. Maybe we only need 19,000 drivers but that's 2,000 or whatever the number is, is not somebody that we have to pay to leave. They leave on their own, and we just don't replace.

Right. So, but I want to kind of step back and talk about this because at the Analyst Day, Nikolaj, I mean, we laid out this digitization of waste management back then. So it feels like -- I mean, where are we on this journey? I mean, it feels like we're still scratching the surface. And this is probably something that can drive continuous improvement and ultimately help your cost per stop or however you define it, for probably a multiyear time frame out into the future.

So if you think about kind of where we came from. So 2019 was a New York Stock Exchange Investor Day, where we talked a little bit about our tech and customer strategy. I got this job in late '17. In '18, if you look at what we had available from a self-service capability perspective, we had a really good-looking website with virtually no transactional capability. If you went in and you wanted to submit an order or sign up for service, you would -- it would look like you were sort of interacting with an e-com platform. But really, what you were doing was filling out a form that would be sent to some human being probably in Phoenix behind the scenes who would take all that information, key it into a system and pick up the phone, talk to a number of other folks and ultimately make it feel like an e-com transaction. That whole platform is now being built out. We've got wm.com, which is our customer digital experience platform, 1 of 5 platforms that we have. It's fully built out and fully usable. We're still evolving features and adding capabilities. But it is already, and I think we've shared some of this on earnings call, so this isn't new, but close to half of our residential open market business comes through that platform. It is our fastest-growing sales channel for our collection line of business. So we are transacting more and more business and signing up more and more customers through that platform. That's a good thing. Of course, it's one thing to sign you up. It's another to self-serve, so that when you've got questions about the bill, you want to know when the truck is going to arrive, you want to schedule an extra pickup, you can do that. Those are some of the capabilities that we're building out. We have Bill Pay, of course, we've got ETA or estimated time of arrival, but you can always add more. But we have a platform that is now -- the front end looks great, but it's connected into that back end. So that when we give you data, it is reliable. So we are, this year, together with the customer organization and Mike Watson as the Chief Customer Officer, on a big drive to get customers increasingly to adopt those capabilities and to make it, frankly, very hard to say no. Jim mentioned the example of a customer that called in to complain only to realize that it wasn't Waste Management he had a complaint with. 1 million of those 14 million calls that Jim mentioned are customers that aren't even customers [indiscernible] call, let's not even route those to an agent. Let's take them out, so to speak, in the phone system, have them self-identify and not even get through to an agent. If you want to pay the bill, pay the bill online or using the app as opposed to when they come through. So we've matured those capabilities to a great deal. But I think what might be more exciting from an impact perspective is all the stuff that's happening on the back end on the routing side. Because if I remember back to 2019, when we talked what we were doing in routing, and we've used words like optimization and so forth, and as I said to the Board a couple of weeks ago, optimization means different things to different people. Back in 2019, really what we were doing, it was called service delivery optimization. That's a lot of process change. It was basically, you take the beginning 15 minutes of the day and the end 15 minutes a day, you do everything you can to slim down that amount of time. So drivers aren't standing around idle. That was basically process and performance management, not a lot of, lot of tech. Then we move to M100, which we talked about for a little bit. M100 was about taking that middle part of the day and optimizing. What does that mean? That meant that when we created a route for a driver, we would show in a tool for a route manager, the route that the driver was supposed to take and then overlay the actual route they did take so they could be performance management and coached to follow the route originally prescribed. What we're doing now is we are fully automating the creation of these routes. And again, through all that very complicated math that is driven by our AI platform called Newton, leveraging 40 best-in-breed cloud-based applications to cobble this whole thing together. And the impact potential of that, I mean I -- we can't share numbers and we shouldn't share numbers because we're still in the process of piloting and fine-tuning, but that is what is so incredibly exciting. So it's not just about connecting the front to the back, which is important for self-service, it's about optimizing and automating how we go and put some of these things together from an operations perspective with a view to reducing the labor pressure, but also, frankly, unlocking some cost savings.

Yes, people look at this industry as old and antiquated in a way. But there's this move from the front end to capture. And let's say, I'm a Waste Management customer. I mean I want to talk to you, but I don't really want to talk to you, so I want to have data flow back and forth, I want to know that maybe you're not going to pick me up on Tuesday. And so there's a customer service aspect. And then even on the back end, it's more of an optimization and kind of driving costs down.

So when you take the human interaction out of the middle of that. I mean there's the customer on one end and the onboard unit on the other end. I mean, there isn't anybody out there, not UPS, not FedEx, certainly not in our industry, short of maybe Amazon that is truly optimizing the entire routing process through a process as opposed to a person. So it's a big change for us, and we think that there's a huge, we have to go down this labor reduction road. I mean, we've talked about a lot. This is not -- it's not going to improve. I mean these trade type jobs are not going to become easier to fill. So this is just 1 of 7 or 8, 5 or 6, whatever areas there are that we can reduce it.

The biggest challenge that I think we have from a tech perspective, and I say this to my director all have heard this as they've joined. I've got a relatively new management team that I put together over the last several years. The biggest challenge at WM is prioritizing the opportunity because there's so much of it. And what a great thing that is. It's not like we're just trying to figure out how to go -- there's so much opportunity, to your point on we're sometimes viewed as sort of old and antiquated. But if you told me 3, 4 years ago that I'd have a director of machine learning that was building the most sophisticated routing algorithms sort of known to man, I would have said, "Really, is that where we're going to be?" But that's where we are. So we've come an awfully long way and I continue to be very bullish about the future because there is so much opportunity. And the hard part, frankly, is prioritizing those things that are going to that -- in addition to derisking the company, are really going to move the needle from a cash register and bottom line perspective.

And so where do you think though, competitively also? I mean how big of a competitive advantage over time. Do you think that this really build to moat versus a lot of the smaller haulers who may not be able to offer a digital offering who may not be able to...

I think part of the competitive advantage, Tyler, is looking at our cost structure. And does it differentiate us to the customer? It does. But where I want to see the competitive advantage is instead of being OpEx, 61% of revenue, how about 55%, and how much can I -- so I'm looking at it more from a cost standpoint than, okay, the customer is going to make a decision. They're going to opt for WM versus connections or somebody else because we have a prettier front end and it works well. I think there is some differentiation there. But Nikolaj and I have talked about this a lot, which is, is this top line or bottom line? I think it's a bit of both, but I'm really focused on the bottom line. I'm focused on taking cost out of the organization. That's what I'm really focused on. And to the extent that I -- he talked about it being a revenue driver because it's now our fastest-growing sales channel. That's great. That's not what I'm focused on, though. I'm focused on how do I get from 61% to 55%, maybe 55% below to 53%. And at the same time, offering a better service of [ our product. ]

All right. So -- but it feels like this is a little bit more of an intermediate term opportunity. So in the near term, I mean, we're feeling labor pressure today. So can you talk a little bit just as we pivot away from that discussion just a little bit about your flexibility around price and your ability to offset underlying unit cost inflation because, quite frankly, that's what everybody out there is really focused.

By the way, I don't know what your definition of intermediate term is because I mean I think we'll take out -- we talked about 2022 taking out some of these jobs. We haven't given the number for 2022, but we're going to be taking out some of these jobs in '22 and '23, and it's not insignificant. With -- to transition to price, I mean, look, I think price is a natural mechanism to combat inflation. We're putting as much price as we can, possibly put on the street, it's why our churn. What tells me that there's real strong inflation out there is that our churn numbers are at historic lows. And yet we're putting out significant price increase in the -- and not creating any churn. So those customers realize that, yes, they may not like seeing a 20% increase, but they know that they're going to get a 20% increase with anybody that they go to. So we're using price aggressively to combat inflation. And I think we're being very successful with it. We've talked about what we think -- what the expectation is for 2022, it's not going to surprise me if we exceed that expectation. But look, anybody that says that inflation isn't real, is living in [ norm Alaska ] because it is absolutely...

It's probably bad there, too.

Maybe.

Yes. I'm not sure. So here's the problem. That was too much fun because we're up on our 30 minutes. So I appreciate everybody for joining us, and thank you so much.

All right. Thanks, Tyler.