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

Back to our program, so back to solid waste, Waste Management. We have coming on the stage with us, Devina Rankin, who is the Chief Financial Officer; and John Morris, who is the Chief Operating Officer. And we're here to talk about all things waste again. So we have had -- how do we had. We've had 3 garbage companies up so far. And the focus that I'm trying to pull out at our Investor Summit this year is that I don't really care about the last quarter, what I care about is sort of the trends. The things that can be influenced. As the top of my list has always been the most important thing to focus on and the organic growth is the thing you can control and that's price and the volume piece takes care of itself if you've managed the asset utilization, the market selection correctly. And then there's selective unique things you can do around volume. So can we start this conversation talking about not because you're big, relax [ Chuck], we're not having that conversation. But you are big, you're everywhere.

What's the opportunity to really maintain a pricing discipline that drives operating leverage through the business model, given the changing dynamics of the market, the inflationary environment, the labor challenges you've lived with, help talk about the discipline in your model that helps assure that you can do that.

So what I think is important is that we look at price in a multi-faceted way, maximizing customer lifetime value is the thing we talk about within the organization is important.

So don't lose them.

Exactly. Customer retention is key, which, of course, that starts with service, but differentiated service is something that also extends to price. Beyond customer lifetime value, we focus on return on invested capital and thinking about the differentiated asset network that WM has in the marketplace and ensuring that we are getting the appropriate return for having in 16 of the 20 largest MSAs in North America, having the best or tied for the best place landfill assets in those markets. and ensuring that we think about not just what those markets look like today, but how those markets are going to evolve over the long term. In terms of customer lifetime value and retention for us that has been service-driven and thinking about the benefits that come with WM customers recognizing not just the service that we provide day in and day out, picking up the waste from the street, but thinking about the investments we're making throughout the value chain. That means that this is not just a service that they can count on today in terms of disposing of waste, but actually maximizing the value that can be created from it. And so environmental sustainability has also been imperative to how we think about the pricing elements of the business. It's also important that we think about managing our cost structure. And when you maximize the efficiency of the business and really drive cost optimization through automation and optimization, which are part of our DNA and the way we've always done business. We know that we can differentiate there, too. And by having a really solid focus on taking care of our business in terms of maximizing what we do there. We can extend that to the price side of the equation as well. I think that when you look at the impact of inflation, it's really interesting. John and I have both been in the business a long time and sat around the table preparing for earnings calls and investor meetings for a really long time. And I remember all the conversations where we would talk about 4% core price and 2% yield and that being kind of the indicator of where we were providing the right leverage from that cost structure into margin expansion. We're in a completely different environment today, obviously. But we know that what we have shown in this business is a resilience that we always knew was there, but it also lends itself to thinking about that long-term formula and what it will look like for the long term is dependent upon how you take a core price dollar in the WM model and translate that into yield.

Well, and narrow the spread.

Exactly.

When you're done. So what's on your dashboard as the senior operator managing this diverse team that gives you comfort that you are improving that, narrowing that gap? Is it employee retention and churn. What are the things that you're watching in your model that gives you comfort? Because this -- you're big, and this is not a market share big. You're just big. There's a lot of moving parts. And how do you have a span of control here?

Well, the obvious question, Michael, is first, when you look at the way we're organized 15 areas here in the States and 1 in Canada, having the right leadership in all those areas is key. And then obviously, our job in Houston is to support those folks. I always say, our job, we don't service the customers every day. Our job is to remove obstacles and put those folks in a position to be successful. So first and foremost is how are we organized and how are we supporting the business outside of what happens on 800 capital. In terms of the things that are on my dashboard, I mean, arguably, a lot of things are on my dashboard, but you can't focus on all of them. I think you picked up on one that's -- we talk about people first, right? And what does that mean? And for us, like I'm sure a lot of folks in the audience here, the last handful of years have been challenging, prepandemic into the pandemic out of the pandemic, what's happened with the generational shift in labor, how are we addressing that? I think the good news is, is that this is still a people business. right? We are making a lot of efforts to optimize, automate pick a phrase. But at our core, we're still a people business, right? So us really getting more deliberate and intentional about how we're going to retain people, where are we going to go and attract people because if you look at -- if you just look at the stratification of the workforce now of who occupies our key frontline roles, and each of those folks, it's just math at some point, they're going to end up leaving the workforce, right? So how do we make sure we extend the work life for those folks and a lot of that has to do with what we're doing around technology and automation and optimization, we can certainly extend the life of some of those roles. And then what are we doing and where are we fishing, what ponds are we fishing is? Because traditionally, this industry has had folks out the front door saying, "Hey, I want to come work for in this industry or for your company", that has clearly changed. And we've certainly recognized that, and that's a lot of what we focused on the last 2 years about, first of all, making sure we're market competitive with wages to make sure we've got a comprehensive benefits package. Those are table stakes now. So I would tell you on the people front.

Do you have to bring in-house vocational training?

So it's a good point. We actually have 2 dedicated training facilities we own and operate. One is out in Arizona, outside of Phoenix, and then we have another 1 in Florida. And what we're doing there is we are bringing through, I forget the capacity, I tell me. It's about 125 to 150 drivers, technicians or potential drivers that can cycle through these facilities. We have dedicated staffs there, and that is all they do. So we're bringing in drivers, we're retraining drivers. We're bringing drivers from outside the company. We're bringing folks from outside the industry. We're getting folks CDLs who don't have CDLs. We're training our technicians -- so those are 2 areas we've made heavy investments and we're happy with them. We're going to continue to do that. But we also have to admit the phrase that made you say that we got to fish in other ponds that part is changing. So while we've invested in very deliberately inside WMs walls as well as we're also doing things outside what we would traditionally call the kind of the recruiting efforts.

So part of my conversations have been this industry needing to tell its story and there's a whole levels of what that looks like. But one of that telling that story is to a future employee base. And so where is that conversation when are you inside high schools or actually are you going in at eighth grade and starting. Where are you starting those conversations where you're demonstrating the appeal of this One, there's a path. It's not just sit behind a truck for 25 years as there's a path. What are you doing there?

So I think it's a multipronged approach. First of all, when I mentioned fishing in other ponds. We are talking to folks in high school, I think about I'm dating myself now, but I remember sitting in the cafeteria in high school and who was there every quarter, the military was there, and they were there all the time. And there was a lot of folks who ended up going to the military because of their recruiting efforts. When you think about that, we needed to get to folks younger in their education line because a lot of kids are coming out of school now, and they're deciding, do I want to go on and take on 4 years of school and the debt that comes with it, and what do I benefit from it? What's the return on that investment versus what are my other options and you think about roles in our industry, tech and trade jobs. I mean, those are very well-paying family supporting roles that they can fill with great benefits. We just weren't telling our story. So we need to be in high school. So we need to be out in front of the military, we'll be out in front of the women's group so we can actually tell the story about what it means to come work in this industry and for WM.

So I'm going to have a whole conversation about fleet at a different level, but at its high, high level, has the truck been redesigned, so it can combinate the diversity of the workforce and it's women or average heights are different. Men's average height is different. It's the hit that the foot is different. Have we done that?

We are in the process of doing that. Have we done it? Absolutely not, because if you look at our numbers of how friendly we have been traditionally as an industry to the female population, it's not enough. So when you think about, as an example, we talked about all the time, including last Thursday on the call that we're going to automate our residential line of business, right? Getting on off the truck 800-plus times a day is not meant -- not everybody is built for that. But if you get in a right-hand drive cab where you can operate a joystick and service 1,000, 1,200, 1,400 carts a day. That jobs a lot more appealing to a much broader diverse set of folks. And so there's 1 example where I think we can make -- we've made some progress, but still have plenty of opportunity.

I know that we're talking about the driver and tech part but I think it's also important to think about what happens in the rest of the organization. And one of the things I'm most proud of is the receptivity that tomorrow's CEO, who we don't even know yet is having towards this industry into WM specifically because we are now viewed as an innovator. We are viewed as a sustainability leader. So the things that today's high school student cares about are things that we are really invested in. And so there's an enthusiasm about working for WM today across the employee base that it's really exciting about the future of this industry.

So one of the measures of that, and then -- and we've got to move off of employees here for a second, but one of the measures is the success rate in which you convert an inquiry. So is -- how -- I mean is the back side of that is your retention. You keep them more of them. But the front side is, do you have to recruit 10 people to get one or are you recruiting 5 people and getting one. Is that -- how has that improved?

Well, first of all, that ratio, it's interesting because Michael it was at an all-time low during the pandemic. Where everybody hung on to everybody. Nobody wanted to go in anywhere for all the obvious reasons. And as we came out of that, we saw our attrition rates go back to norm and then surpass that almost to peak levels. And when we really kind of got into the details there, we realized there were some lessons learned. And for the last probably 2 years, we've been very deliberate site by site and how because the culture of -- we were trying to build a culture for WM, but there's also 1,200-plus locations around the country, and they all have their unique set of challenges, different leadership. So what we've done...

It's a local Global business.

It's a local business and what we've done in partnership with the field leadership, the business leadership, our HR team, is really have a strategy that is site by site to identify what the puts and takes of what draws people in and why they're leaving. And it does vary from site to site. But the good news is our overall turnover rate is probably down about 450 to 500 basis points between drivers and technicians over the last 18 months.

Now that's a huge savings right there, just the recruiting process alone.

Well, if you think about the -- in talk -- you're talking about efficiency and safety, right? However you define efficiency, but definitely safety. When you're turning folks over at that rate, you're never going to be the patient as you could, and your safety results are going to struggle. And that's one of the things we've seen over the last handful of quarters is our safety results steadily improving, which to me is paramount.

Right. So I want to talk about volume from the perspective that you shouldn't do all the business you necessarily do. You don't need to do it for practice. But where are you in that life cycle for Waste Management and sort of cleaning up we don't need to do this for practice.

Well, I think the first line of business we talk about often and have for the last few quarters has been kind of our residential line of business. I think last quarter, we traded off about a little less than 3% for the volume -- for the price results we've got. And that's been the trend for the last handful of quarters. We're not intentionally shedding the business, but we are making tough decisions where we can't get the right rate structure, the right contractual obligations in place, we have to make a decision where to employ our capital. So we started to do that. But it's not just about shedding that business. We are having a bunch of wins there at the same time where we are re-upping with customers franchise municipalities, who recognize the value of the service we provide and are willing to engage with us and pay an appropriate amount where we feel comfortable investing. I would also tell you, though, Devina's point earlier about differentiation, it's not just residential, it's not just franchise business, our national account business has been a place where we've had a ton of success over the last handful of years. And I don't think it's about the fact that we've been in a good position to disservice. And I think it's about the suite of services we can offer that segment of the customers, which has been growing at a really great rate over the last couple of years.

So this is -- you as a company, say, national accounts a lot to the stock market. What is a national account. So everybody actually understands what it means. Let me say national account. Because is it just -- it's a big brand and you're at 2,000 locations? Or is it a -- how do you really approach it? Is it a truly national coast-to-coast, or is it super regional? What's -- how do we think about that? And then what's the book of business? How much is it?

So it's the Home Depot, it's the Walmart. It's Family Dollar, Dollar Tree. It's all of those large customers who have a footprint across North America, where they can come to WM as a one-stop shop, where that model used to be is in place of a broker model. And so that was viewing aggregation with one of the large national haulers as advantageous to dealing with the broker because you're dealing directly with the person that's going to also be serving most of your location. Where we've differentiated that now is that we also can deliver insight and information to their sustainability goals and objectives by helping them understand the waste flows that we are managing on their behalf. And we have seen tremendous traction in that regard with information and data that is now a valuable resource to them. And is giving us good traction from a pricing perspective. That book of business is still sub-10%, but it is growing, and it's the fastest-growing segment of the commercial and industrial line.

So if I was cynical about it, all those companies are the toughest to deal with from a purchasing standpoint, not to get -- their price. They're just going to squeeze you to death on price. I remember under different management, the Home Depot contract traded big companies over time. And both of them at the time said, "Yes, I'm just as happy I don't have it because it was almost 0 margin. I mean it's -- we're -- I mean this -- help everybody understand that this isn't about dummying down the margin. This is that there's you're getting paid for the service.

I think whats really important here is our customers speaking on our behalf essentially because we've had what I'll call boomerangs where those customers used to be solely price-focused and thinking about managing our service to them based on price and price alone. And those conversations are fundamentally different today. And so the boomerangs that I'm talking about, they will leave and go to a cheaper price model, and they come back very, very quickly. And as a result of what we are seeing, it's not just those that come back, but those that are staying with different price increases than what we've provided in the past, because we are providing a differentiated service in terms of that data and focus on sustainability and long-term investment in sustainability is a differentiator .

So let's segue to that then. And I'm coming at this more from a perspective of what's -- like on the recycling side, I think that big garbage and it's not just public big garbage, but the bigger players with the balance sheet, the capital to do this are, in fact, the saviour of recycling that there's this massive recapitalization of the infrastructure that has to happen to meet the changing demand of the recycling economy. Where are you in that evolution? And how much of it is we need new things versus we can retrofit existing and talk about where we are in that journey and what it means, not just the profit, but the change -- the ability to change behavior of a marketplace.

So this is my fifth year in the job here, Michael, and when I sat down, with Jim, when I took the job. One of the things on the agenda early on was how do we get recycling more healthy right? I don't want to say fixed because it wasn't always broken. It was broken when the prices were down. It was great when the prices were...

Well, most of -- it's a pretty good return on capital business, except when the prices were really terrible.

And so one of the fundamental things she and I chatted about and Devina was how do we get this business healthy in any economic environment. And I think what you heard from us in the last couple of quater, you heard it last Thursday, you heard it from Tara and team on April 5 is even at a combined rate of $54 a ton, you'll keep me honest here, I think that was a number for Q1. It wasn't even sub-50.

Sub-57, right now.

We're happy with those investments. And so when we think about the modernization of a plant, -- in a lot of ways, we have the shale of the building. We're pulling out old technology and putting in new technology. And there's a few things that really come out. First and foremost is there is a meaningful change in our labor rates, right? And with everything going on with labor and as the rates go up higher, that the arbitrage just gets that much stronger in terms of the business case. So -- and then it's overall cost, right? Secondly, as we talk about the quality of materials, right? So you put the same 100 tons through a facility of a day, whatever the number is, we're getting better yield out of the same 100 tons. So the operating cost is lower, the product we're producing is better. And then you end up with capacity, too, because these plants are 20% and 25% more efficient, and if you will, after we've made the investment. So for us, the litmus test has really been -- these plants are running exceptionally well, and they're producing great returns, great EBITDA even in a low market. And if we start from there, that makes us gives us all the more conviction on the investments we continue to make.

And in the context of the quality issue, what's the standard that the market is now demanding in order to service true circularity from a quality? Is it I mean is it 96%, 97% good enough? Or does this have to be 3 9s?

No, I don't think it needs to be 3 9s, Michael. And I think it depends on the type of material, right? The -- what customers want from a fiber grade is going to be different from what they want from plastic or metal, et cetera. So I think the -- what I would tell you is we've won't -- we've never had a problem moving in sourcing our material, and that's part of the value of our brokerage business that we talk about often with no capital investment, low margin, but that actually helps us aggregate almost 2x what we process to be able to move that material. So we've never really had a challenge domestically or even internationally moving that material. But in terms of the quality, I would tell you, we haven't had the problem, I think, with the -- with the investments have done in these new plants has given that much better quality going to our customers. And I think it just helps us be able to have consistent outlets for our folks.