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

Good afternoon, everyone. Thanks so much for joining us as we continue Oppenheimer's Industrial Growth Conference. I'm Noah Kaye, Managing Director in our Sustainable Growth and Resource Optimization research practice. And we're delighted to have the management team from Waste Management here. I'll just introduce them Tara Hemmer, SVP and Chief Sustainability Officer; Brent Bell, VP of Recycling; Ed Egl, VP Finance and Treasurer. Thank you all for joining and looking forward to the discussion.

Thanks so much for having us.

So Tara, you took the role of Waste Management's first Chief Sustainability Officer last July. And I know I should be calling the company WM now. So we'll refer to you as WM in the future. You're managing $3 billion of revenue that's growing at a higher rate than the corporate average. And you have a commitment to invest $1.65 billion over the next 4 years in some specific sustainability initiatives. So as we approach the 1-year mark of your time in the role, what can you share revolving -- regarding your evolving mandates, your strategic priorities? And how investors should be gauging your process?

Yes. Thanks so much for that, Noah. I think it's such an exciting time to be at WM and be in this phase. I think if you take a step back, at the heart of what WM has always done, we are a sustainability company, being North America's leading environmental services provider. What we really had to do, though, as a group and a leadership team was really think through how are we going to leverage this platform that we have to meaningfully grow and scale the company and at the same time, ensure that we're navigating through some risks that are potentially impacting our business and how we communicate and educate what we're doing with internally inside our company, galvanizing our 48,000 employees around our sustainability journey and then also communicating what we do externally. So those were a couple of the key frameworks that we were working on. Now getting our team excited around growth, the good news about that is there was a lot of opportunity and there still is to grow in sustainability within our backyard within our core business. And that really is about leveraging some of the things that we do really well. We're going to talk, I'm sure, a lot today about our renewable energy and our recycling businesses. but our recycling business at the heart of what we do. There's strong customer demand. We have a robust recycling infrastructure that we can leverage. And so how do we catapult that forward when we think through what's happening from a trend perspective. And our landfills, a great example, we generate landfill gas each and every day. That is a resource that can be used instead of being wasted and flared and can provide a real, true financial value to the company. So when we think about how to measure the progress, it really is looking at how we're growing the company through the sustainability-related businesses, what we're doing to develop capabilities that our customers are going to need and want in the future, what that means to WM financially. And we put out there some financial commitments on our CapEx investment and what that means from an EBITDA perspective, but also their carry on environmental benefits that are going to drive the amount of material that we're diverting and also reduce the amount of landfill gas that we're flaring going forward. So it's really connecting the dots on all of the stakeholders and how they're going to be positively impacted.

Right. I think that's a great overview. And I think historically, this industry waste -- particularly waste collection has been fairly fragmented. There's been lower barriers to entry, one would argue relative to disposal. But in the last few years, you've started to highlight how technology and sustainability can actually drive a competitive advantage even in the collection space. You announced a large customer win just this last quarter. So can you help us understand as concretely as possible, what are customers asking for now? What are they willing to pay for? And what can WM offer that smaller competitors can't?

Well, your question is so timely because yesterday, Brent and I spent a full day with our customer teams unpacking this very question. And in a lot of ways, it's a tough question to answer because when you think about a customer, we have such a wide and diverse customer base that goes from your large national accounts to municipalities to a pizza shop on your street corner, and they all have different needs. But what I will say is the thing that transcends all of them is ultimately, they want 3 key things: they want a partner, they want someone who's going to help them serve and solve whatever their needs are. And if they're very complex when you think about our national accounts customers are very complex, help me solve some of my biggest challenges. And increasingly, that is in the sustainability space, and it is around driving more services towards sustainability. So recycling is a great example. They also want deeper insights into how to run their business better when it comes to waste and recycling. And that really speaks to the core of our data. We have vast amounts of data. You've heard John Morris talk about our collection trucks being rolling data centers. We have more technology on our trucks than anyone else in the industry, and we're able to take that information and provide really deep insights back to our customers. It could be around rightsizing their business, but it could also be around how they can improve in the sustainability arena. And then the third thing that all of our customers want across any sector is really impact. What is the impact of my waste and recycling services? How are you positively impacting whether it's my bottom line or from a safety perspective or also potentially from an environmental perspective. We run the largest natural gas collection fleet in North America, and that is a differentiator for WM. And some of our customers are keenly interested in that. So you take that umbrella and then you can apply it to different customer segments. If you look at our national accounts business, though, that's where we've been very successful. We are clearly differentiated. We have a lot of things that the competition doesn't have, the brokerage business that Brent Bell leads is one of them where we can tap into a lot of the needs that customers have at back of house. If you think about cardboard, plastic, shrink film. These are things that are critically important to how customers are thinking about the circular economy and their broader sustainability journey going forward.

That's great context. Maybe we can zoom in on some of the market and opportunities, starting with recycling. So Brent, you've talked for many years about the challenge and the need to build markets for recycled commodities. So given the increasing corporate commitments, the circular economy policies and new technologies for extracting value from the bail, how are you seeing the markets evolving? And what's WM doing to help really support growth in those markets?

Yes. Noah. And thanks for hosting us today as well. We really appreciate that. So we had talked about for years. The recycling space demand is so important for our customers, right? They expect us to have good, solid homes for their materials that are sustainable and they can move every day, right? That's important because every day that customer wants to put more material in their bin and make sure they have good homes and end market at the end of the day. At WM, we have one of the best direct export teams in the market. So taking cardboard, for example. We have an international presence that moves material for us in different parts of the country. So we have relationships with hundreds of paper mills throughout the world. So we know when additional capacity and investments are taking place and make sure that our materials are moving to the most efficient operations that are out there. When it comes to plastics, a few years ago, we decided to make sure that all of our plastics stays within -- domestically within the U.S. And so at that point, we searched out for these markets that had really a sustainable story that went with it. And so today, you see our frontline employees collecting curbside recycled material. And in a few weeks, that same material, plastics turns back into uniforms that all of our frontline employees are wearing, turns back into new carts that we're going to be placing on the curb side for MSW as we are recycling. So as we found ways to tell that circularity story, we try to make sure that our customers, government agencies have that same type of policy in place where to support recycling, they're actually buying with their procurement department, materials that are made from recycled content. So as you mentioned, you've got CBG companies that have targets set out, you get regulation coming online, a minimum content is helping out and then you've got the consumer demand for it. And all those together makes us feel pretty good about the demand space for this material in years to come. And our task right now, quite honestly, is trying to unlock more of the supply, so we can help meet those demands.

Makes sense. So when we look at the, I believe, roughly $800 million CapEx spend you've budgeted over the next 4 years for expanding recycling. How much of that is greenfield versus automation versus perhaps downstream integration into different recycling streams? How do we think about that?

Yes. So that's a good mix. And when you look at the automation side, we've had success with some of our earlier automation plants like Chicago, Salt Lake City, Raleigh, for example. And we've really seen the benefits of that. And those are 3 primary benefits as with the automation, you're reducing the labor that is really hard to fill, especially in today's times with today's labor market. You're making the quality of the material that we sell even better so we can sell for a higher value as well as make grades that perhaps we weren't able to make before to extract more value from the materials we collect. And then the third piece of that, Noah, is expanding the capacity. We're able to process a lot more through in a shorter period of time with these new investments. And so we're seeing the automation kind of get prioritized just from a return standpoint. But not to say that it's not a mix of new markets, and we're very excited to get into to help unlock more supply of it in the future as well. So right now, I'd probably say it's about 70% weighted towards automation with that capital spend, but it doesn't mean we're not looking the other way when it comes to new markets that we can enter into.

And what is the strategic rationale today for making greenfield investments? I know sometimes in the past, it's been to win municipal business, but you have a pretty robust presence throughout the country. So talk to us about why you might be making greenfield investments now?

Yes. So I think we look at greenfield investments in a couple of ways. One is, externally, we've done some review on what are some attractive markets to be in, whether it's population growth or certain regulations that may take place that are attractive to be -- WM being in that marketplace. In certain cases, there are situations where we have WM volumes that we control to go to a third party. That third party just hasn't invested in their equipment. And so we see a need for that. But more so is when we look at how do we get more material from the trash into the recycling bins and where are the markets that really aren't that recycling friendly today than we can enter into and access more of this material. That's some of the attractive qualities that we look at these new markets.

I think just to add a little bit of color to that. I think what's important to note is even beyond those new geographies and it really is about expanding capacity even in the markets that we're already in. So if you look at how much material we expect to grow in the recycling space, this is also -- even in the automation, it's about adding capacity so we can grow. We know that recycling as a service, it's going to continue to be a need for customers, and we're seeing that. So definitely feel like that's going to be a growth market for us longer term in both the automation projects and the new market project.

That's very helpful. I think you've touched earlier on some of the benefits of an automated MRF or modern MRF. Can you give us a little bit of a finer detail on that? If you can walk us through the economics of the modern MRF and really how to think about the delta between a traditional versus a highly automated MRF, which used to be called the MRF of the Future, now it's the MRF of the present. So give us a sense of the delta there.

Yes, sure. Noah. So a few years ago -- and we're really fortunate at WM. We've got a really engineering team that's been around for a long time. And so we kind of sat at the table a few years ago and said, how can we -- labor is roughly half the cost of a traditional MRF, right? And we knew that labor positions were really hard to fill, these sort of positions were hard to fill. The turnover rate is very high. And so we kind of came up with the task of how do we eliminate these hard-to-fill positions with automation. And so our engineering team came up with some really good designs. Chicago is actually a patented design that we use in Salt Lake City. Using the best of the best equipment vendors throughout the world to have these facilities, cherry picked essentially the best equipment we can. And so when we looked at that, we thought, okay, initially, yes, we can cut out labor, right? And there's an offset on the capital side from labor and depreciation with additional depreciation expense. But the labor we were seeing was about a 30% reduction on average. And so we solved the labor piece is a great offset. And then the side benefits that we get with that were this expansion of capacity, so we could actually fill the MRF up with more tons as well as material value that -- because of the way the new technology works, we're able to sort material to a finer grade, right, whether that's color sorting or whether that's actually upgrading the fiber. And so we saw that the end market customers are willing to pay us more value for those cleaner material streams. And so that was just a side benefit that really makes this returns on these investments look really attractive in the future. And so the older facilities, hopefully, in the next few years, we're able to upgrade all the automation. That's the plan that we have in place today. And so we're executing on that right now.

And if you have it, how much would that lead to in terms of improved throughput, what would that do to increase capacity?

Yes. So I think the -- I'm not sure if we've released a lot of capacity numbers now, but I can say that as we're looking at that with new markets, we're really looking at growing our sustainability footprint in the recycling space. And I think we've got some sustainability goals at some point, they'll be released, they'll really highlight that. We're very excited about that.

I think it's fair to say that when we make these investments in automation, it's absolutely increasing the tons per hour that we're processing.

Yes. Okay. Great. Thank you. A question on the organic front. We have seen some aggressive policy measures, notably in California, where that organic diversion mandate just seems to be running well ahead of the infrastructure that's actually in place to serve the mandate. So how do you position to serve in markets like that? And what are the opportunities you see arising from increasing regulation around organic?

Yes. It's a great question. We obviously have a large presence in California, so are very attuned to what's happening in the organic space there. And always difficult when regulation is in front of capacity. But that being said, we really view it as an opportunity. We've made some strategic investments in California. We're developing composting facilities at some of our landfill assets. It's a great opportunity to leverage that infrastructure that we already have in those places to be able to build capacity, to accept food and yard waste, and we've done that in Northern California and in Southern California. We also have new technologies that we're bringing to bear in Los Angeles, at the Sun Valley Recycling Park. We have a recycling facility there, but also an organic processing facility for commercial organics. That was part of our LA franchise, and we're looking at how we can leverage that technology for other customer types. And then, of course, in Oakland, where we really built a truly integrated state-of-the-art facility that takes materials after recyclables have already been pulled out of it and really trying to pull out the organic fraction. And I think what this highlights is there's different approaches based on the customer needs and wants, and what their material looks like. We also have other technologies in the Northeast, primarily our core technology, where we can take source separated food waste and convert it to a bio slurry and leverage excess anaerobic digestion capacity and wastewater treatment plants. So these are things that we're looking at. Canada is another great example, they're on the leading edge of really organic infrastructure and developing those capabilities. And I think it really is about just understanding for us. What we're trying to do is understand where the trends are headed. So we can be thoughtful about what infrastructure would we want to have and place if some of those regulations are going to pop. And then also, we have national accounts customers. They have their own sustainability rules. A lot of those are in the supermarket and food and retail space, and they operate across, in many cases, all 50 states and Canada, they want a nationwide solution to try and get plugged into that network longer term.

Okay. Very helpful. And I would just observe that to the extent that the mandates are complied with, it's certainly an opportunity for you be seeing more of the streams from smaller dollars, and there's a good internalization opportunity for you as well. I wanted to pivot into renewable energy RNG development. So I believe you're building 17, roughly new plans next 6, 4 years. And you noted last week, you'll stand up your next RNG plant in the next couple of weeks. Build the fourth plant by 4Q. So can you just talk through the process that drove your decision to make these investments? And how you're evolving your approach to the ownership of plant economics?

Sure. So I think it's important to note, WM has been on a renewable energy journey for the last 20 years. This is not new for us. We have a long history in converting landfill gas to renewable electricity. And have done that quite successfully and built an in-house team over those years. I would say, when we took a step back about a year ago and started to think more aggressively about this, we really looked at 4 key ingredients that WM has that no other entity has in the same way that we do. And the first is we have an unparalleled network of landfills over 260 landfills, 144 of those have active landfill gas projects. Some of those are energy projects, some of them are medium BTU or RNG plants. So we have a wide and vast amount of supply or feedstock to go into renewable natural gas opportunity. We have the team because we've had a team in place that now had to build and scale renewable natural gas plants since we built the first one back in 2015. We have the largest fleet of compressed natural gas trucks in North America, over 10,000 and growing. So we're in a very unique position to close the loop, produce that landfill gas, convert it to renewable natural gas flows that pathway, create a RIN because it's going into our trucks and monetize it. And then finally, when you look at our cash flows, our cash flows are so strong, and we're thinking about how do we put that cash flow to work in a meaningful way. And we looked at opportunities, M&A versus organic growth. And this really is the best organic growth opportunity that's in front of us. If you look at the payback period on these projects and -- less than 3 years and even conservative pricing, it really makes a lot of sense. And while moving from 4 plants to 21 is a big step, and it will involve us getting more deeply embedded in some of the commodity price impacts. We know that there are things we can do to navigate that. And all of the trend signals that we are seeing regarding the demand for renewable natural gas, not just through the RIN pathway, but also through large industrial users who might want it for off-peak, were very strong where it made sense for us to make this investment.

Yes. There's a lot of considerations on the revenue side of the equation for RNG. Something that doesn't get talked about as much is just cost efficiency, right, in technology cycle improvements like -- our latest figures may be out of date, but we understand it might cost roughly $8 per MMBtu to just operate these plants. So what's the opportunity to improve CapEx and OpEx efficiency of these plans over time? Obviously, if you can reduce that, then your risk around returns and future declines considerably.

Yes. I mean it's something that we're constantly looking at. If you look at the first one we've been built in 2015 and the one we're building today, there have been technology advancements and also operational improvements that we've made along the way. And so we certainly believe that there's going to be innovation, enhancements in the technology space. I will say one thing that we look at and we're very proud of is the uptime in our facilities and how much material or gas that we're able to flow through and clean up through our systems. And that has consistently grown over that time period. So I think we'll see an improvement. Is it something that's going to go from like $8 to $4? Probably not or not anytime soon, but we'll definitely see incremental improvement.

Okay. That's very helpful. It's a question about landfill gas in a different way. One of your peers recently noted that the industry historically doesn't directly measure future of landfill emissions, right? I mean it's always been based off of EPA models. These are huge plots of land and very heterogenous in terms of what's in them. But we're looking at that potentially changing, right? I think we've looked at technologies like aerial laser spectroscopy. So can you just talk a little bit about the industry's piling work in that regard whether you expect, over time, to get the ability to directly measure emissions to landfill and what benefits you might get if you can, in fact, do that?

So this is something that we've been very close to. And in fact, in 2019, we set a 2025 sustainability role to be able to directly measure emissions from our landfills. This is a known challenge in our industry and there are other industries, for other reasons, that have to model their missions and that's what our industry has historically done. Now that being said, there are so many different technologies that are out there that are looking to tackle this problem. And we have satellites, airplanes, drones, fixed sensors, a whole host of items. What was previously invisible is now visible. And the task at hand is to be able to take that data and information at one point in time and be able to calibrate it so that we have an idea of what our emissions are across a 200, 300, 600-acre footprint in some instances. And I do believe it's going to help us drive greater insight into where we can tackle and provide investment. But I also think one of the things that's likely to show is that, in some instances, our modeled emissions are overstated.

I mean just to have the data would certainly help with your reporting, but our understanding of how those models work. There's a lot of assumptions around topography and wind speeds and things like that.

All that yes. And you're actually -- like in a worked way, the models penalize you for investing in more fill gas collection infrastructure in a particular footprint, which is very counterintuitive and definitely overseas in that example the -- being fugitive emissions at our facilities.

So I guess then just to put a fine point on this, you feel like based off of the piloting work being done, now you are on track to get to that 2025 sustainability goal?

Yes, I mean there's -- this is a great example where we're in the era of partnerships and collaboration. And there are a lot of collaborations happening with NGOs, with academia, with start-ups, with other industries who also have similar challenges to figure out how we can move on from and get that model measured.

Okay. We're looking forward to that. I think it's always better to be able to measure the problem you're trying to manage, and it will help with the ESG reporting as well. The last question I have before we look at Q&A is really about technology automation and people. In the last 2 quarters, the company has set some pretty clear goals for reducing head count by 5,000 to 7,000 physicians through attrition over time. So first, what are the main levers to achieve that goal, if you can touch on them? But then at a people level, how do you plan to retain people and maintain high employee engagement at the same time that you're affecting this attrition?

So first and foremost, I think when we look at this goal of reducing 5,000 to 7,000 jobs. It might sound counterintuitive, but we're looking at it through a people-first lens in how we're making those decisions. So let me give you some examples. I know Brent talked a little bit about the automation and our material recovery facilities. These are rules that are very difficult for us to fill. In many instances, we're relying on temp labor. They're hard jobs. And if you also look at the cost associated with those jobs, the cost will increase, and we may not have a labor pool to tap into at all longer term. So there are some instances, though, where there may be WM employees in those roles. And one thing we are absolutely going to do is look at those valued employees and say, we're putting in all of this new equipment in our recycling facilities, and we're going to need technicians to maintain that equipment. How can we upskill you as one of our valued interested employees because you've been here for a year or 2 years and put you on a path to learn, grow and develop? Those are examples of how we're being thoughtful about many of the positions. Now some of them -- we have such high attrition rates on some of these roles that we won't have to navigate that impact, but we're really trying to be thoughtful about as people are impacted or potentially impacted, we have so many other positions that we're trying to build, making sure that we provide that pathway for them. Now if you unpack the types of roles that we're considering, we talked a lot about the material recovery facilities. The other big one is our residential line of business. If you look at our residential line of business, and we have still a fair amount of residential work that run on 2-man routes. That's the trucks where you see someone riding on the back of the truck throughout your neighborhood. And so many different areas of the country have moved to automated side loaders with an arm. It's safer. It's more efficient, and we can attract a higher quality driver who is more of a driver technician. And so those are just a couple of examples, but I want to make sure that everyone understands that we're really trying to be thoughtful about how we navigate this automation there.

Yes. I think I asked this in the call this week, but I wanted to follow up on that in a -- just a very practical way the idea of taking more of the collection trucks from rear load to automation side loader. I'm in down in New York City, it's a little bit hard at this point to imagine a mechanical arm. There's a lot of trash on the alleyways. So what's actually feasible right now in terms of converting some of the rear loader routes over to ASL? And then how much is that going to require some meaningful changes in behavior by municipalities and other customers?

So I can't really comment on New York City because we don't operate collection in New York City, which is a whole another topic. But when you look at our residential business, absolutely, there's going to be conversations that need to occur with municipalities, but here's the reality. Reality is if you look at whether it's WM or a small mom-and-pop company, there's a labor shortage when it comes to drivers. And certainly, when you think about helpers, very, very hard to fill positions. So there is a bit of a burning platform to change behaviors to be able to provide consistent and reliable service long term to your customer base. And if you're a politician, that's your constituents. And we know that when we provide carts to homeowners, it's a safer operation, but also when you think about on the recycling side, we know when we provide parts, our recycling rates go up. So it's about packaging that story so that they understand what that's going to mean for the people they serve.

That's very helpful. We actually had one -- we have some questions, but we have time for one question that I think dovetails with this, which is, is plastics recycling profitable for the company and what is the company doing to improve plastics recycling rates?

You want me to take it or do you want take it?

Yes. Plastics, that's my favorite conversation. So we've seen a drastic increase in plastic prices over the last few years. specifically last year, the milk jugs, natural HDs, what we call it. We're over $2,000 a ton. Today, the plastic water bottles, soda bottles, PET, is over $1,000 a ton. So we're seeing some really high historical prices for plastics. The demand for plastics is what's driving that. We talked earlier about the CPG groups that are using more in their products that they sell every day. And minimum content is helping that, but also they have their own goals out there. So we see plastics as a big opportunity to unlock more supply, help municipalities out on their economics to their program. But it's one of the most profitable materials that we process today and for the municipal economics I gave a speech at the U.S. Conference of Mayors that just showed a typical community that gets paid, let's say, $1 million in rebates for their commodities, If they just dealt their plastics, they would double the profitability of their economic recycling program based on an average structure. So definitely unlocking plastics is something we're very geared up to do.

Terrific. Well, I think that's all the time we have, but we touched on some great topics, and we're looking forward to the company's continued progress on all of these fronts, certainly encourage any investors to follow up with us and the management team and Ed, in particular, if you have further questions. I want to thank you and thank everyone listening for the time today. I hope everyone has a great rest of the day, great conference and smooth sailing.

Thank you.