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

[Audio Gap] of all this, 3 days of a lot of great meetings, but this morning, I'm excited to have Waste Management with us, WM, maybe affectionately known as, but for those that may not know WM, I mean this is the largest solid waste operator in North America, incredibly strong franchise, a great franchise of disposal assets. Obviously, they have a very robust collection operation as well. There's a lot happening, Jim. We're going to talk about it. There's definitely a lot happening on the green CapEx side that could build to a very interesting mid-decade story. So we will get with all that. But presenting today is the company's CEO, Mr. Jim Fish, as well as the Chief People Officer, Ms. Kelly Rooney. So I don't know that we have any slides.

No slides.

Okay. No slides, but we're going to maybe give a lay of the land, who you are, what you do, what makes you a little bit different. We'll kind of start there, then we'll kind of get into the core business. We'll talk about some green CapEx. This is interactive. So if anybody has any questions, please let me know. You can interrupt me. That's not going to hurt my feelings. So Jim, I'm going to turn it over to you.

Okay. Good. Well, good morning, everybody. I think Tyler did a good job of kind of describing who we are. We're a North American company. I've been with the company for 21 years, 22 years, in my seventh year as CEO. I think as we talk about what the company looks like on a go-forward basis, strategically, there's really probably 3 big focal points here. One is pricing. For those of you who are familiar with the industry, pricing has probably not been a strong point over -- if we look back over a couple of decades. But for us, it's maybe second only to safety in terms of religion. So we're very focused on price, and we've obviously seen the value of it over the last few years. So price is always going to be in there. I don't talk about safety because safety is something that's just something we do. It's not as if we are incented to be better or be safer. But -- and then second on that list, which Kelly can talk a lot about this because cost control whether it's operating cost or SG&A is a big component of permanent reductions and those are an important part of our long-term strategy. And a big piece of that is -- can be addressed on the labor side. It's an industry where labor -- the pool of trade jobs is shrinking and we've seen this coming for probably half a decade. So how do we take advantage of that? How do we turn that into a differentiator for us? And then the third one, which will probably talk maybe less about today. We can talk about it all you want, but we have a virtual Investor Day coming up on April 5, where we'll talk about these renewable natural gas plants. We'll talk about the retooling of these recycled plants. And what that means for us what the opportunities are, what the different vehicles are for adding cash flow and EBITDA to the business. But maybe to put it succinctly, we think the business will go somewhere between -- from 2019 to 2026, '27 in an industry that's a pretty mature industry and a company that's been around for over 50 years to grow EBITDA by somewhere in the neighborhood of kind of 75% to maybe even close to doubling over that period of time. It is pretty impressive. And when those of you who saw us at the Investor Day in 2019 in New York, where we said the range of growth for EBITDA was kind of 5% to 7%. Since 2019 through 2022, we grew it well north of the high end of that range, by the way, through a pandemic that we haven't fully recovered from, is pretty good. So a little bit of an insight.

So. Double EBITDA maybe or almost there, 19% to 27%. So you gave the punch line. Now let's just tell the joke. But I do want to kind of go through how we get there?

No joke.

No, no, no joke, an [ analogy ]. But I do want to kind of start with the core business. Obviously, it's been a dynamic market. Last year was mired in high inflation. I want to talk about how nimble the business was? How you reacted from a pricing aspect? I mean this is typically a business where you may take a price increase early in the year. That kind of suffices, but last year, it was different. So maybe talk about the inflationary environment and how you guys reacted to that?

Last year, just in and of itself was challenging because the inflation came on so quickly. And so we -- I think we did an effective job of combating that with price. But as we said on one of the calls throughout the year, look, it was kind of hand-to-hand combat. We really weren't able to put a lot of margin on the bottom line because when you're looking at 9% inflation or whatever it was for the year, I think 9.5% was the high maybe in Q2. Trying to combat that was challenging with price. And by the way, 9.5% was just kind of the reported number, macro reported number. We were seeing significantly higher inflation, particularly on the labor line, so I don't know, Kelly, what our labor inflation was last year, but it was -- in some cases, it was north of 15%. We added $120 million of labor, if you think about it as on the expense line over what we budgeted. Some of that, though, if I just talk about it as kind of a longer-term strategy, and I'm going to let Kelly talk about it a little bit is designed to take advantage of this shrinking labor pool. And so there's a number of things we're doing and what I've said, and then I'll turn it over to hers, if the pool is shrinking, but I can get my slice for the pie and you can't as a small guy, then it's actually a competitive advantage for me. And by the way, what we're seeing as we've acquired some of these small companies is that this systemic problem with getting these trade jobs is not getting better, it's getting worse. So our turnover, for example, which is a good indicator of that has kind of gone from maybe a decade ago, 15% to 20%, is now really almost historically going to be 20% to 25% and that sounds bad until you look at some of the small guys who are -- we're acquiring some of these small guys. And they're the one example I gave was the guy that we bought recently, who said I asked him why you sold to us. We've been approaching you for 25 years, you never wanted to sell and he said, I could not be an HR coordinator for my entire job and his turnover was north of 50%. So I'll let her talk about how it kind of differentiates us, I think.

When you think about the human capital landscape rate and what's happening with that labor pool shrinking, baby boomers exiting the workforce, rise in the majority of millennials, right? That's -- it's a really big deal in terms of labor constraints. So we are transforming our business through the infusion of automation and data and what we plan to do is take out 5,000 to 7,000 roles between 2022 and 2025. By the end of last year, we had accomplished about 1,000 of those. So certainly well on our way. And we'll do that through really moving from rear load residential work to automated sideload work, which takes the person off the back of the track, reduces labor cost, increases efficiency and enhances safety. We'll take out 1,000 or more jobs in our recycling business as we retool our recycling facilities and infuse state-of-the-art technology there. We have this incredible roll-off end-to-end optimization engine, which is really you kind of think of it as sort of generative AI, right, that's generating this optimum logistics experience, that we're seeing really positive results from unmatched, first of its kind from an efficiency perspective. And then our customer experience team, we've seen really high attrition rates there, more than 50%. And by infusing the digitization of the customer experience, we've dropped our call volume by 25%, and we're not refilling those roles. So we have created a competitive advantage that is only going to continue to grow and be unmatched.

Sorry. So let's kind of step back a little bit going back on price. Because again, going back to this nimbleness, not all of your contracts, though had the ability to just react to the market. So if can you talk a little bit about the part of the business that's a little bit more open in nature, what is kind of restricted and how you -- how ultimately that played out maybe in '22. And then as we think about '23, the ability to kind of catch up on some of those CPI resets?

Yes. So let's talk about the more restricted piece first. And it's -- about 40% of our, if you think about it on kind of a revenue basis, 40% of our revenue has some type of index driver to it. And a lot of those have a 12-month look back. So there are typically some type of CPI or a percent of CPI or a regional number, but they're driven by some price index. And all those indexes have been going up. But if you're looking back 12 months, you don't really capture the full benefit, if you will, on the price side to us until you get down the road a bit because of the 12-month look back. So as a consequence, 2022 would not have seen for a 12 -- a contract that's got a 12-month look back. We wouldn't have seen the biggest benefits in the climb in CPI. We saw the cost side for sure, but we didn't see the price side, and we won't see that until sometime in '23. So that's why we said we we're bullish on those resets that are taking place this year. If the peak of inflation was Q2 of '22, then it doesn't take a mathematician to figure out that we're not going to see the biggest benefit until we get to Q2 of '23 in terms of the price recovery. And so those -- that's kind of 40%-ish of our business. The other 60%, that's typically open market is where I've talked about us really kind of gaining religion and understanding kind of next best alternative and that type of pricing, particularly, Tyler, as we think about our landfills. So if you're not really overly familiar with the business, I know you know what a landfill is, but our landfills are very well positioned, and we've talked about kind of 16 of the top 20 MSAs where we have kind of the best located site. And that matters because the closer you are to the population base, the cost there is to move that material. So if you're -- if I'm in the middle of North Dakota with a big landfill, that's fine, whether anybody out there. So I got to move -- I'm moving trash from Chicago to North Dakota, and there's a lot of cost involved with that. If on the other hand, if I have a site that's sitting right outside the population base or in some cases Houston, Texas is a good example, where we have a site that's sitting right in the population base. Our Chief Operating Officer, who retired a couple of years ago, his house is a mile away from our landfill. There's a lot of high dollar homes right around that landfill and -- but that's valuable to us. But I don't think we've fully taken advantage of that value. Everybody would ask us, including you would say, why not raise landfill pricing more? I mean it's a -- there aren't very many landfills. You're not getting any new permitted sites, maybe one every decade, nobody is getting into. It's super expensive to get into the landfill business, not only from an environmental standpoint, but just from a capital standpoint. So if you do have 16 of the top 20, why aren't you the best at raising price at those landfills. Fair question. I think we've shown over the last probably 3 or 4 years that we start to recognize that. And so we've raised landfill pricing. Last year was probably our best year. I would still argue that we have more room to go. By the way, it's a precious commodity because the space there is limited. Those landfills don't last forever. They have a limited life to them. So why not preserve a little bit of that space by raising price. And that's an important aspect of what we're doing. Price is always going to be paramount for us.

Yes. You seem to know me. I would definitely ask that question, but going back to -- just the kind of around this whole discussion out. I mean -- and we've had a lot of discussions with some of the other haulers. And just kind of this idea about pricing kind of in excess of whatever the cost environment is. And I know that if you look at your margins, they probably are under a little bit of pressure in the first half, but we kind of get back to that point where we reach that inflection. There is a lot going on with commodities and stuff going on in the margins. But the idea here is this is a business that should be able to at least meet its cost inflation and hopefully a little bit more?

No doubt about that. I think, Tyler, when you look at the margins on a kind of a quarter-to-quarter basis, there's some ebbs and flows in it. But if you look at the long-term trend for our margins, particularly as we talk about, what Kelly talked about, which is big cost reductions and price increases getting even better at price increases. I think you see our EBITDA margins clearly, just for our core business. Forget about the renewable natural gas business because when that is fully up and running for those 20 plants, EBITDA margins blow through 30% because the margins on those plants are 75%. Set that aside because that's kind of an easy one. But if I just look at my core business and taking margins up by kind of -- if today it's going to be kind of 28.5% to 29%, taking it solidly through 30% on the core side through what she talked about on cost controls, and efficiencies and using data and analytics. And then also getting smarter -- even smarter with pricing, I think you see the core business ex R&G going through 30% sometime in the foreseeable future. And then at the same time, you add in this RNG business, which I know we'll talk about that a little bit, but we don't know whether we maybe did a not necessarily a great job explaining what we were doing there. But just to give you the Reader's Digest version, I mean, you're taking a business that, that kind of material is coming to us anyway. And I've been asked -- if I've been asked once, I've been asked 100 times why aren't you adding volatility to your business with RNG? I guess we are, but this would be like saying, what if we discovered that the fumes coming out of the tail pipe all of a sudden were really valuable. And -- but there was some volatility to it, if I captured it. Yes, I guess, we're adding a little volatility, but those -- that exhaust is coming out anyway. I would say the same thing about renewable natural gas. These landfills create gas. That's what they do. And about 55% of that gas today is essentially being flared off. So can I do something better with it, both economically and environmentally than just flare it off. The answer is renewable natural gas gives us that ability. So does it add a little bit of volatility? It does. Are we going to try to mitigate that a little bit? We are through signing some offtake agreements that lock in some price. But look, it's going to add just with 20 plants, by the way, add $500 million of EBITDA by the time we get to 2026. And I say just with 20 plants because we have 265 gas-producing landfills, 66 gas-to-electric facilities, 20 of our own RNG plants that we will build over the next 4 years. So do the math, there's still some opportunity left there.

Yes. So real quickly, I do want to touch on volume, then we're going to get to green. We're going talk a little bit more about the CapEx. But obviously, this is not an industry that grows tremendously, but there is a piece of the business that has a little bit of volatility to it. Now most of your -- and maybe you can talk about this. Most of the business is under a subscription type of model. The unit of service is pretty static. It doesn't usually change, a house, a yard in the commercial business. But can you talk a little bit about your temporary roll-off exposure? Are you seeing any impacts from the housing market there? Is that something that you guys are thinking about this year? Again, I know volume is not a huge piece to the story, but it is something that I get questions about.

So here's what I would say about volume, Tyler? First of all, for '23 specifically, there's going to be some macroeconomic impact. I can't tell from day-to-day what it's going to be. I look at the market yesterday and look at the Feds kind of saying, okay, we're going to we still have a long way to go. And so what does that mean for the economy. We're going to have a hard landing because the Fed is going to overshoot. I don't know. I mean I wish I could predict this kind of stuff. What I would tell you about our own business is that we predicted flat volume this year. Temp roll-off is probably going to be a little bit soft. The good news about -- because of the housing market. The good news there is we are half as exposed to that as we were in 2008, 2009, but if I think about volume on a longer-term basis, we always talked about 2% volume growth. Here's where I feel pretty bullish on it. And that is that as we take this share and we are taking share, I gave earlier in one of our earlier meetings an example of a national account that we just took a pretty big national account. It was a national account that we used to have, and we lost it. And we lost it to a broker. And if you're not familiar with brokers, they basically kind of put together a big network. They compete with a national company like us by putting a network of small haulers together and effectively creating a national company. The problem with those small haulers is that they have 50% turnover in their drivers. They're selling to us. They're selling to Waste Connections or Waste Management or public because they don't want to stay in that business. And so this share opportunity for us gives us the ability to be something more than just 2% growth. If all we are is just a company that grows with GDP and grows a little bit on the resi side with population, then yes, we're probably a 2% volume growth company over the long term. If, however, I can take some share because of technology that we're putting in place that can't be replicated, because of this pressure now on the broker model that has -- the broker model and some of the smaller companies model has been, I'm going to have that 30%, 40%, 50% turnover on my drivers but I'm going to use price to undercut the big 3 guys. That model didn't work very well in a high inflation economy. So I think ultimately, volume growth for us ends up being a bit of a tailwind because we're going to take share.

Yes. So when we -- right, so this is interesting. So when we think about brokers, we think about digitization, differentiation, we think about pressures on small haulers. This is not you making some change on the pricing algorithm. It's just that those -- that part of the market is probably structurally under some pressure. [indiscernible]

What we've understood about the effect of price on volume is that our business is very price inelastic. Our customers aren't super price sensitive. Part of it is because our business makes up a really small percentage of their overall cost structure. So if I think about a big business, it's like less than kind of -- it's like 2/10 of 1% of their cost structure is waste or recycling removal. So while the big, big companies, their procurement officers are looking at every single line item. Certainly, the small companies aren't looking as closely. And even if they are, does it really matter that I've got a $20 or $40 increase. On a percentage basis, it might be 10%, but it still is $20. I mean -- so I think there's now an understanding that we have a very price insensitive customer base and the price that we're ultimately charging, I'm paying $60 a quarter for pick up at my house today, and yet I'm paying $200 a month for my DirecTV service. And by the way, if one of them went away, I can tell you which one I'd be more concerned about. If my TVs go off for the next quarter, I'll figure it out. If my trash is on the curb for the next quarter, that's a problem.

Yes, so help me -- you have 23 million customers. I don't know if that's the number, yes, 20 million. I mean, there's a lot of customers here. So small increases on the lot is a lot, it's kind of how math works. But anyway, I do want to kind of switch over. We've maybe got a few minutes here to talk about the green CapEx. You guys have already touched on quite a bit of it. But I want to hit actually on -- so there's multiple prongs here. To me, there's really 3 things kind of going on. We have the RNG investments, we have an investment in recycling, which is where I want to start, and then we have the automation, which is not so much the green CapEx, but that's another prong in story. So can you talk about the $1 billion of investment in recycling? What exactly that is? What are you doing with that billing?

You want to try this one? Because a lot of it's you, a lot of it is labor, so.

It is. I mean what we're really doing is infusing those recycling facilities, which historically have been really reliant on manual labor, right? Humans standing at a line, picking out different commodities and infusing state-of-the-art technology like optical sorters and air separators. So we take those people off the line and it does more than just reduce labor costs. It increases capacity. We can put more tons through those facilities. And then it increases the overall value of the stream because we can make higher grades of paper, for example. With humans, we could make only sort of a mixed paper grade. But with this technology, we can make a high grade, which pays sometimes 10x what a mixed paper grade might pay. So you get this sort of combination of values from infusing this technology into those recycling facilities. The payback is really incredible because you see it in more than one place.

And when we put numbers around it, what is the kind of yield that you would get off of that investment? Because I think it's pretty attractive.

So the number we said was for rebuilding these. I think we're rebuilding 30 plants and adding maybe 12 or something. The number was $240 million was the EBITDA number by 2026. But that really just includes the labor improvement, which is about 30% is what we're seeing in our -- the ones that we built so far. And that's commodity price improvement on the back end. It doesn't include the throughput increase. But if we include those 2, it's about 20 -- call it $0.25 billion in EBITDA. The paybacks are slightly slower than our RNG plan. RNG plants are kind of 3- to 4-year payback and in some cases, less. For the recycling upgrades, the paybacks are more like 5 to 6 years, but still really strong.

Yes. That's -- so right. So that's one kind of piece to this -- of this building block story. On the RNG side, so it is a little bit different. You're taking much more of, call it, a capital-intensive approach more of an on balance sheet type of approach, if you will, which is to your whole point about the volatility. So maybe talk a little bit about why you're taking that approach as opposed to partnering because most of the other players out there are looking at partnering, you are tending to do this kind of on your own design, build and operate?

Well, first of all, we have the flexibility to do both. We can do on-balance sheet, we can do off-balance sheet. I think one big, big difference that is unmatched between us and a Republic, for example, is that 75% of our fleet is natural gas. So we have a much greater ability to convert those D3 RIN credits. If you're only 20% natural gas, the way the credit works is when you burn the fuel, then you -- as the producer or the fuel on the other side, you create this credit, which is very valuable, and we can sell those credits, whether it's to traditional petrochemical company or a dairy company or whatever. But our competitors are kind of in that -- some of the -- I think -- I don't know the exact percentage, but call it kind of 20%, 25% natural gas fleet. We're 75% natural gas fleet. So we have of the 2 revenue streams at an RNG plant. Everybody has the natural gas sales, but we're much -- we're kind of unmatched in our ability to create those credits, which ultimately are the more valuable of the 2. At the same time, Tyler, we still have the ability to partner and kind of do this off-balance sheet. So if you think about how many potential plants we have, 265-ish landfills. I think at 267 is an exact number, but 20 is what we've committed to build RNG plants on. We have 66 gas to electric plants currently, haven't baked anything in to our guidance about what comes out of that set rule from the EPA in June, which possibly gives us, and we think it gives us some opportunity to generate E-RINs, similar to RINs, but an E-RIN, and they're kind of about the same price, basically. So there's some value there on E-RINS and there's no capital there with those 66 plants that we're currently generating electricity at our landfills. So I think we've got some real flexibility. You will likely see us do something with respect to a third party at some point. And then there's always the option to fully monetize this if we decide, you know what, we're just simply not getting the trading multiple inside of WM that we would get outside of the company with a BP or one of the big integrated players ultimately buying that business and paying some of the multiples we've seen, kind of 25 times when our trading multiple is 13, and we feel like we're actually getting lower than our trading multiple for that RNG business, that maybe it makes sense to monetize a portion of it outside of the company completely. I think we have some flexibility with all 3.

Yes, very interesting. But this is something on the order of $0.5 billion, I think, with just the first tranche?

The 20 is $0.5 billion by 2026, '27.

Yes. So $0.5 billion there, $0.25 billion. We have a question.

What are you assuming for increase in prices?

So we assumed $2 in the -- and $2.50 natural gas pricing. So we felt like that was pretty reasonable over a period. It's been -- again, it fluctuates. And so we have -- we are looking at -- in different terms for sure, but looking at locking down some of the pricing and not all of that, but in some of it, so that we protect ourselves a little bit and reduce a little bit of volatility.

What percentage do you want to [indiscernible]?

It depends. I mean, I think we'll probably talk more about that on. Tara will give you more answer -- a better answer on April 5. But I don't know what that percentage is today, but it could be as high as 50%, 40%. It depends on where we're able to lock in.

Yes. So kind of coming back to it. So the $0.5 billion to $0.25 billion, it seems like there's some opportunity from attrition on the 5,000 to 7,000. But maybe, let's call it, $1 billion, a pretty visible EBITDA that kind of steps up through the next few years. You kind of talked about organic growth. You have it self admitted. I think it's 5% to 7% organic EBITDA growth assuming nothing unusual happens. So you kind of play that math out. I think it kind of gets back to where we started to and that's kind of the story, and that's kind of what maybe leave everyone with is that the next few years, there is some pretty visible stair step to ultimately lead something much bigger?

Well, I mean, look, we said 5% to 7% in 2019. And then from 2019 to 2022, we grew at over 7%, so we grew above the high end. And again, we grew through 2020 and 2021. And our commercial business and some of our roll-off never fully recovered from 2020 to 2021. There's still a lot of small businesses that haven't come back from COVID. Even with that, we still grew at the high -- above the high end of the range that we gave in 2019. So you can do some kind of simple projections and come up with a pretty big number by the time you get to 2026, '27. But the one last thing on the RNG business. There are some really interesting investment tax credits available to us. There's some time lines on those. So for example, we need to make investments by the end of '24, which is why you're seeing this acceleration -- in large part, why we're seeing this acceleration of CapEx is so that we get to take advantage because the plant has to be started in order to take advantage of the ITC credit. But those ITC credits are kind of in the -- from a cash standpoint, are in the neighborhood of $300 million.

Meaningful. Perfect. Well, I think we're out of time. We do have a breakout. So Jim, thank you guys, thank you so much.