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

Okay, everybody. We're going to get started. I'm going to try my best to stay on time. So we're starting on time. It's my pleasure to open up our post-lunch session with Waste Management. We have with us -- so Waste Management is divided from an operating standpoint at the Senior Vice President of Operations at 2 separate sections, the East and West. And with us, we have Steve Batchelor, who's SVP Operations on the West. What is the dividing line, the Mississippi River approximately?

Alabama.

Alabama? Okay. And then Rafe Carrasco, who is the SVP of Operations on the East. So he's got one half of the country, the other half of the country. So thank you both for being here.

My pleasure.

So a much more heavy operating conversation as we come out of our luncheon break. But I do have to ask a high-level question. So help us understand the name change and what it means to you running your company at the customer level? What's this mean?

So first of all, we're so much more than just a waste company.

But you're a garbage company first?

We're a garbage company first. There is no doubt about it. But now we're -- we look at ourselves as an environmental solutions provider. We're a sustainability leader. Our customers ask us to do a lot more. But again, we're much more than just a garbage collection company, a landfill company. We're a renewable energy company or a recycling company. We're an energy service company. There's a lot of things we do. And I think just the name Waste Management kind of isolated only one thing that we did. So we changed the name to WM, and we think it better fits what we do and what we provide for our customers.

Michael, to your point about the customers, though, we did a fair amount of research and surveying of our customer base, and we found that there is a large amount of latent value unlocking the brand and the brand really was WM and not Waste Management.

Okay. All right. But I'm just going to repeat myself. You're a garbage company first, who does really cool sustainable stuff, not a sustainability company who's in the garbage business.

Yes, but I think it's evolving. I mean, I think customers are asking us. Businesses, a lot of the Fortune 500 companies, they have a sustainability strategy and goals. And I think we need to be a leader and be ahead of that. And so eventually, it will change. If you look at an integrated business, being a collection company as well as a landfill company, landfills was the only thing we did. But now you look at the recycling, that's one of our leading ROI businesses, the recycling business. And renewable energy is not bad either.

Right. So, okay. All right. So let's tackle a couple of things from an operating standpoint because this is things you all have to live with is we're in an inflationary environment, have you heard? And so the objective of trying to get price, help us bring together the -- what you're trying to do at the operating level and then how that translates back into what ends up reported as the yield and the puts and takes against? If you're in the market with a 6% on the core, how that's turning into something at the levels in the 4s that you produced. What's causing the gap? What's that ratio of reported versus core? And what are you all trying to do at the operating level to narrow that gap?

So maybe I'll grab the top line, at least, and maybe, Steve, you can fill in the gap on the operations side. So quite frankly, Michael, we haven't seen any meaningful discrepancy in churn as it relates to the tenure of our customers. In fact, our churn at 8.8% is actually near record lows at the moment. We also are near record lows on our rollbacks, which to me and to us indicates that there's a fair amount of receptivity from the customer base out there, that there's going to be price increases and the inflationary pressures are going to continue to be a part of what we do. From the operational side, I don't know if you want to expand?

Well, I would tell you, in inflationary pressures, pricing is definitely one of the levers we pull, but there's other tools in the tool bag. One of that is the efficiency. I mean, the more efficient we get, we lower our cost per unit. That's something we don't have to go back and chase in price.

Right. But to that end, within -- how do I think about the formula that's the core to translating into yield? What are the puts and takes that you can control? Some of it you can't, but some of that you can control that can help narrow that difference between what the reported yield is and the actual go-to-market with?

We actually have seen that the gap between our disposal and commercial core price and our yield is within the same ranges that it's been on a percentage basis, historically. If you see a particular discrepancy in magnitude, I would point you to the 30-plus percent increase in special waste that we saw in Q1 of this year versus Q1 of last year.

Right. Let me tease on that for a second. I think that new business formation and service interval cycles haven't peaked. And that's a contributor to a volume as somebody has an idea and they fill up an empty store front, the box goes behind it, that's volume. And pre-existing, the boxes are falling, your system's telling you, let's upgrade the service. The special waste numbers, I would think is supportive of that thesis because it's an early indicator of moving dirt and what have you related to non-res construction, things like that. Is that a good read through?

It could be. I think it's a good way to look at it that special waste could be the part that starts first before manufacturing improve, before volume increases. So I think that is a good way to look at. But as Rafe has said, the difference right now between our core price and our yield, that difference, it's within what it's been for...

So it's been very consistent ratio.

Yes.

Can the ratio improve? Or is there just structural aspects of the mix of the customer base and then what have you, that, that ratio is kind of where it is?

So 40% of our customers are index customers, right? So that presents its own challenges. I think those have been talked to ad nauseum by not only us, but other presenters as well. So that has its own cycle of evolution. I think we're all embarked on a quest to be able to actually bring up those yields there, the average unit rates of some of our index business.

Okay. And is some of that just at renewals, you're either not going to do it for practice and so you let it go as opposed to converting from a traditional index to a different index?

It's a little bit of both. Little bit of both.

We'll convert indexes. We'll try to negotiate and work with -- it's primarily municipalities and residential contracts. But we'll work in the scope of work to change that. I think it's important that, especially in today's environment, in the workforce environment, that staffing is another problem that everyone has talked about, obviously. And for whatever reason, generationally people are -- what motivates them to what they want to do as a living has changed. And we have to make the job a little bit easier. So everything has to be containerized. I mean that's something we need to work on. And that will change the efficiencies, which lowers the cost per unit. And then when the index part of it hits, again, it makes that part of the business -- so that line of business a little higher margin.

Okay. So I wanted to touch on the whole subject of labor. I think it's something everybody needs to talk about right now. So there's two pieces. One, it's -- your view about where you are on getting your underlying wage base at consistently out of market and then being able to manage the rate of change in that. So it's not at such a high level that has been through the second half of last year, earlier this year. And the other piece is talking about that addressable pool and what you're doing to be creative about expanding the addressable pool and then improving the retention of who you have because at the end of the day, that's probably the most...

Yes. Well, those are two big levers. They're very important. So first of all, like the others that talked this morning, we were proactive on looking at -- doing market area analysis on wages in certain parts of the country. We found out everyone was impacted, urban, rural. It was about -- the amounts were different. The labor dynamics were a little bit different, but increases were across the board. And our wage went up from -- compared to the comps from Q1 this year to last year, it's up 10%. But we started the increase in the second half of last year. So I think we'll start seeing normalized in the second half of the year. And will it be that 4% or 5% difference, we think so, but we're going to have to wait and see. We're not going -- we're going to keep doing the analysis because we're going to be proactive. We cannot get behind the situation or the wave that turnover and retention -- the lack of retention causes. I would tell you that, yes, wages have gone up 10%, but the lack of skill is causing wages to go up even more because just the lack of productivity and the lack of efficiency, the impact that it has on safety. So those are things that are very important to us. In terms of what we're doing to broaden the net, if you will, to bring people into the organization, there's one thing, I think, as an industry that I think we're -- we don't do well at, and that is telling our story. If you really think about it, we provide family-supporting careers. You heard earlier with GFL that drivers are making $100,000 a year. We're seeing that too, even more. I joke sometimes how do we get MBAs into garbage trucks, for example. In many cases, our frontline people make more or have the potential to make more than a lot of people who spend a long time in school. So I mean that's -- I think we need to do a better job than that. Second, we got to broaden that...

So I get that. But what's -- what are some of the obvious things that can be done as far as that message?

So right now, we're actively involved -- we want to be a leader in the industry in employing females in the organization, we want to have -- and that's across all levels of the organization. So we've partnered with Women in Trucking. In fact, you're going to hear later on, I think, after us, you'll hear from Kelly, our Vice President in Human Resources, she's on the board. And so they're helping us understand how do we get that message out to that segment of the workforce as well as through recruiting, through -- we talked, I think, earlier this morning, I talked about approaching 18-year-olds or approve 18-year-olds to drive versus 21, approach them in school, 18-year-olds, just like the military does approach them and let them know what their career opportunities would be available in this industry. So as we go forward and we kind of share our message -- and then we got to back it up. We got to provide the wages and the benefits. We're proud of the fact that I think it wasn't probably 5 years ago, 60% of our employees participated in the 401(k) event matching program. Now it's 88%. We've just rolled out the education program, not only for our employees, but for their dependents. And I forget the number of schools, but it's over 100 schools that participate that people can get further education. So think about the potential of an 18-year-old, just reaching them out of high school, come and work for us, find out if there's a career here. If you want to get your education, you can get your education. And then there's many rungs in the ladder to go up the career and become an executive at Waste Management and end up sitting on the chair next to you and talking about investments in the organization.

Okay. All right. So where are you in open positions relative to where you would like to be?

So we've seen sequential improvement from Q3 to Q4 to now Q1, and we're seeing a pretty positive start to Q2 as well in terms of turnover overall. Where our focus continues to be is those under 1-year tenured employees. They continue to be difficult to keep. A lot of our focus right now is in what we call onboarding, right, and on-the-job training. And we are configuring the organization to more aptly support the process. But it's also sort of a bit of a cultural change. We're beginning to look at what demographics are we attracting and who's leaving at a faster rate and what sort of changes do we need to make organizationally to be able to support that.

Okay. I've asked this from everybody. I'm going to have this conversation. The next panel is the Women in Waste panel and talking about trying to move the direct workforce from 10 to 50 over a decade. Does the truck cab have to be reengineered to address the difference in hip to -- ankle to hip, access to pedals, hip to eye to...

That's a fascinating question. I don't know the answer. I will tell you that with our efforts to increase our female workforce, we're seeing areas that have it highest, districts operating locations that has female drivers as high as 15%. And they're able to do the job and they can do it very well. I've never asked one of our female drivers if the ergonomics in the cab is -- I think it's a fascinating question, and I know that some of the vendors are here in town, and I'm going to pass that along, and I'm going to ask that question.

Well, it's -- why I ask it, Subaru is the #1 selling car in the United States for women and part of it, I think, absolutely has to do with the comfort sitting in the capsule, if you will of...

Yes. Fair. I think that's right. I think we need to make everything about the job more convenient to the generation that's coming up and the generation behind that generation. Like right now is I grew up -- I've been in the industry for over 25 years. And there are people -- the drivers that like work in 50, 60, 65 hours a week. Now you've got a generation that maybe wants to work 30. And then you say, "Well, okay, magic wand, we're going to make all routes 30 hours." Well, the people that are still with us, they're used to that 50, 60 hours. And they're, "Wait, wait, I still want to have my 50, 60 hours." So we need to figure out ways to be...

And we have 1 truck work 60 hours with 2 people.

Right. Exactly right. And then -- and so we call that an optimal work week, where we bring people in and they want to work 4 days a work -- a week, maybe will work 3 10s, 3 12s. We'll keep that truck running, we'll maximize the asset and we'll knock out that turnover and retain. And again...

I can't add much more about cab design, but I will say this. I think historically, the generations of men who have driven trucks, refuse trucks, have put up with -- a lot with respect to the cabin, whether it's noisy, whether it rattles. I think what we're seeing is not only from a female perspective, but generational perspective, they don't want to put up with that. And so we have to change the design at the very least there and also sort of improve the way in which we maintain those items.

Right, right. Well and then safety is critical and yet all this introduction of technology causes the driver to have to do that a lot to look over here, instead of looking through the window -- windscreen and stuff like that. So okay, enough on us trying to force to redesign of that. Equipment is on allocation across the model. How is that impacting your ability to grow the business organically?

Yes, really not impacting it at all. Now we are seeing some slippage on the deliveries of trucks. But over the years, we've made tremendous investments in our robust maintenance systems. We've got the tablets that technicians use. We've got the systems in place to figure out what parts are on order, what parts are lagging, how can we share parts across the enterprise. So we're going to see that represent a little bit of an uptick in our maintenance costs across the year. But it's not going to impact our new business.

Right. So -- but that's probably the only real issue then was what I'm hearing is that the age -- the fleet will be a little over, and therefore, it has an incrementally higher each year dollar per hour of maintenance costs. But other than that, it's manageable?

Correct.

Do you think -- and then I think this is probably more relevant to residential business, but it might be true in some commercial work, particularly in markets where there's a lot of new business formation. Are competitors of that volume, public, private, independent, doesn't matter, more cautious about competing for it? Because if they win it, they've got to staff it, they got to put a truck. And therefore, that's an advantage, is evolving too, is that maybe there's less people competing for incremental growth?

I don't know that it's necessarily an advantage for anybody. I think it marks the shift of the industry, particularly on the municipal side. I think a lot of folks are finding that if a particular solicitation ask for new trucks, well, you're not going to get them, right? And we're reaching that point where you can't rent them either, because there's just -- they're not out there, right? And so...

They're [ already ]...

Yes, exactly. So you couple that with the push towards automating a lot of that residential municipal business, and a lot of people are cautious about how we approach it.

Where are you on the innings of automation relative to your municipal book? What's left proportionally?

So we're about 60%, probably a little bit more than that of automation. We've got Jim talk about the technology and automation and improving our efficiency, where it maybe -- might eliminate 5,000 to 7,000 positions. So that's part of the business we're still trying to finish. But right now, if you look at like our rear loader operations in residential, it's primarily combination routes out in the role that do commercial and residential. So that's something we haven't quite figured out yet. The next thing is the yard waste or the bulky waste. It's the best probably truck to go pick it up is in a rear loader. But it's inefficient as all get out. So we're going to have to start working municipals, and we're starting to do that now. And I think the industry needs to push this, is that we're going to have to -- again, especially when the workforce to get them to come workforce, make the job easier, we're going to have to have everything containerized, not just MSW and not just recyclables, but yard waste, brush waste, bulky waste that are going to have to be containerized. If it's not containerized, we're not going to pick it up because we have to automate it. So that's what's left to automate. And then we have contracts out there that still in system. Through the ADS acquisition, we acquired some residential, and we're converting them as we go forward and as the contracts come due.

Is the -- what I call the more plain vanilla conventional takeoff, can we get out of that business?

I think we need to. I think we need to at least -- if not, the costs are going to change because it again -- and there's going to have to be a trade-off. And I think municipalities are going to figure out that. Probably the best option for them, cost-wise, is to containerize them.

And in some ways, it takes us back to labor pools and what you were talking about in terms of getting more females out there, right? It -- rear load is not conducive to that.

No, no. Well, and you take gender out, if you're average -- if you're below a certain height and a certain weight, it just don't have the scale, but lever something on. So...

Not to mention the safety aspects, right?

Yes. Right.

You're a very large operator of landfill. I have maintained for a long time that the 21st century integrated solid waste company is completely indifferent what they do with the waste post collection. They just have to get paid for it. So talk a little bit about why the growing desire for zero waste diversion, none of that phases you from a business model standpoint. I mean barring accounting-related writing down assets, you're not hung up on, if I collected it, it has to go into a hole in the ground. You're much more about don't want to lose control of the collection, is what I would believe.

We don't want to lose the customer, which is the collection part of it. And again, when you look at some of the larger companies, and they're already starting to establish sustainability goals, they have goals of recycling, they have goals of doing better things for the environment, those are their needs that we want to address. So we're focused on meeting their needs. And then following that, that converts into doing things such as organics. You look at California Senate Bill 1383 in the whole state, everything is going to be organic. That's one area that we've invested in an organics program or in Sun Valley, California, we have a transfer station. We have a recycling plant or an MRF. And then we also have an organic, all in one location. So when we collect that customer to customer, where do you want to put it, that's where we'll take it. And it's -- to your point, it's the price and what's the cost, where we still have the margins and the return that we want from all the assets invested in providing that service. And interestingly enough, as I said earlier, is that recycling -- our recycling business is one of our highest return on invested capital. It wasn't 15 years ago, but it is today.

Well, is it not an accurate statement over the last 20 years, there have been a higher percentage of years where it's a pretty good return and then there are periods of really lousy, because of the volatility of the commodity?

That's right. That's accurate. But as we've been able to really redirect the business concept to much more of a fee-for-service base as opposed to some sort of blended price sharing or whatnot, we've seen those returns really amplify.

Right. Right. Let me tease that out just a little bit. You have shared data as a company in the past of total tonnage going through your infrastructure, about 60% on at the MRF and has been converted into a fee-for-service and you're in the 40s of municipal contracts. And the presumption was that renewals, you would just work this through. And that is the -- is there a resistance to that last piece of that -- the collection side to shift the model?

I don't think so. I think COVID certainly put a hamper on it. I think you saw municipalities that did their own collection, even have to hesitate to provide both services. There wasn't enough labor, the capabilities were not there on the residential side, just simply because the volumes were aggregating so quickly. So we lost a little bit of steam there, but I think we're picking that up again and the conversations are productive.

And I also think municipalities are seeing that -- let's say -- I'm just making it up here, let's say you have 9 months, 12 months left in the contract and they know -- once they got to put out for bid again, that just based on the history or the current environment of inflation, they know that that's going to be -- the cost is going to increase significantly. And as the contract comes for renewal, even if they put it out for bid. So sometimes that's an opportunity just to get ahead of it, start negotiating now and see if we can negotiate the situation we...

I guess I will add this, too, Michael. I think there are certain areas of the country and Steve was already talking about one of them in Southern California, but there are others where there's parity between the disposal in a landfill and the disposal fees necessary to actually recycle and make that a viable...

Right. Right. So the other part of that whole conversation about zero waste or diversion and incrementally volume moving from one form of post collection into another is a willingness to pay. And given your geographic presence, you've got hundreds of examples of whether that trend is really moving. Is there a real sea change in willingness to pay? Or is it still a relatively gradual sea change of willingness to pay? And so this diversion issue is, one, you can address, you're willing to address it, but it's happening fairly gradually as opposed to, with any real acceleration?

I would say, as I was saying, is that if the contracts got a little bit of time -- not a lot of time left, there's a willingness. If there are some contracts -- we have some contracts that are long-standing contracts, they are part of some acquisitions we've done over the years that they know they've got an opportunity. It might be a 6-year contract, and they don't want to do it because they know the costs are going to be significant. But eventually, it's going to catch up and they're going to be...

But there's a true willingness to pay...

Absolutely. I would say for the majority of the customers that understand that really want to recycle, want to do the right things for the community, there's a willingness to pay for fee versus the just commodity base.

And to your point about the rate, I think the rate is gradual, but it's a higher rate than it used to be.

Right. Okay. All right. Well, I think that's a pretty important message, too, that the willing -- because I would have said 5 years ago, the willingness to pay, that's maybe not yet because the math is the math. Landfill is post collection, disposal is still a lower cost option. And it's not accurate to say it's not. I mean you may have parity in some places. But as a general rule, it's a lower cost option.

That's correct.

What -- if you looked out, call it 5 or 10, what do you think is the technology -- let me word it differently, post collection, it's not being done yet, but it's going to be because somebody is going to figure out how. Is it -- and I'll lead the answer, it's an organics play is it? Is there an organics play out there that's a 5- to 10-year, it scales -- it works and scales and it's economical? Or are we a lot farther away from a long-term organics shift?

I don't think that we're that much further away. But I also would tell you, I don't think it's just organics. I think there's a lot of recycling content still trapped in the MSW stream now that we can collectively do a better job of educating our customers to retrieve. We've announced investments of doubling down to the tune of $800 million or so over the next 5 years in our recycling technologies. Part of what we're going to be doing is working collaboratively with our customer base to unlock some of that stream.

Okay. And then one of the other major issues and this really is your end of the business because it's going to form your dashboards and your KPIs. All companies talk say the word digital, and digital has become just an easy term to throw out there. But how would you describe where you are in that evolution of the connectivity between the back office, the truck and the customer, that triangle, where there's a true information sharing process, that, one, allows you to run the business smarter, two, allows them to stay informed? Talk to us about what that journey looks like.

So we've come a long way, and I think we've got a long way to go. The benefit is to provide better service at a lower cost. That's what the digital technology is going to do for us. I can tell you right now, we're piloting in 2 locations right now for the roll-off line of business that is basically an end-to-end, where a customer calls up digital -- or not calls up, digitally, they can go online order, the information is received. The information is documented. The information -- the stop is routed, it's available on the OBU for the driver to see. The driver goes in the sequence that the routing tool is set to pick it up. It's confirmed, the customer knows that it's picked up. It's confirmed that it's going to the right location. When it's done, it's confirmed that it's done. And no tech -- or no human had to do that other than the driver, pick it up and take it to the disposal facility or the processing facility. And then when it's done, the bill is sent. So we're not there yet. We're working on that. That's where I think -- my guess is that's where the industry has to go. And it will come. We'll be -- I mean, we're lightyears where we used to be 20 years ago. I remember coming to work in the morning and disposal or roll-off takes to come out, the alpha driver would sit there and deliver it out to the driver. So you get this bad one, I get this good one, when you get this bad one, I get this good one. Well, that's all done, that's gone now. I mean technology takes care of that, right? So we've evolved and we've made a lot of progress, but we'll continue to make.

I think the front end of that -- or the customer-facing side of that is where we've made a lot of progress as well. And we're still not where we want to be in terms of the e-commerce platform, but we've seen triplication of the amount of revenue and the number of customers that are adopting our service through online platforms.

All right. You all made an early decision to go to an alternative fuel fleet. And so you've got a very high percentage of the fleet. And at one point, pre-Advanced Disposal, it was bordering on 70%. It might have dipped a little bit, and you worked your way back. And it was well done, and it was -- truly led to both the fuel and long-term maintenance savings. You discovered that, that's part of the acceleration. But ultimately, the industry seems to be embracing EV. So how do you, in the context of this concentration, make that next transition? And I guess, maybe I'll answer part of the question possibly is, given where you are, it's so high on this already, you have times you're allied to let them figure out, wait and payload and hours of service before you have to make a big move in EV, but...

I think that's right. I think we've got time. Time is on our side in terms of the conversion. I mean, obviously, we're -- 70% of our routed fleet is CNG. It's cleaner, lower maintenance, as you said. And we'll continue to convert. I would say the middle part of the country is to CNG. California is implementing their electronic vehicle mandate, which in 2023, any vehicle you buy that's not electronic vehicle after 2023 can't be used in the operation. And by 2025, 10% of the fleet, Class 6 and up, has to be...

There isn't enough capacity to meet that.

Well, that's the whole problem right now. The technology is not there. We will adopt the technology when the technology is there. We're working with vendors now to help in developing the technology, but it just doesn't work yet. But as states mandate it, like California, that's fine. I think that's a noble goal. But we need technology to help us. And once it's there and the customer demands it, we'll adopt it, and we'll implement it.

So I think the electric powertrain is a reality, and it will have its day. I'm not convinced the battery as the source of the power and that it's possible that we're going to end up more like a fuel cell or something else as the source of the electricity to drive the powertrain. Where do you all come out on that just at this point? And it's more of an interesting conversation than it is a line in the sand.

Yes. I don't think we have an answer for you there. I think we're piloting some platforms already in a couple of places from trucks, mostly on the battery side. And like Steve said, I think we've got some issues sort of figuring out what the infrastructure support is going to have to look like in order to actually take the bolder step there. The other piece, I think, that argues for us continuing to foster our CNG fleet is that circularity piece you were talking about the other day, right? So we aim to fuel the most of our CNG fleet through our own renewables at one point, right?

Right. All right. Well, I managed to do it again already, I'm behind. So thank you both very much taking time for us.

Thank you.

Thank you.