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

Good afternoon. Hi. Thank you, everyone, for joining us. I'm Jerry Revich at Goldman Sachs. Really excited to have with us from Waste Management, John Morris, Chief Operating Officer on my right; and next to John is Ed Egl, Senior Director of Investor Relations. Gentlemen, thank you so much for joining us.

Thanks for having us.

So as we look back at Waste Management over the past 5 years, you folks have compounded earnings at a nice double-digit rate. Got some good combination of pricing, a little bit of volume, M&A. Can we talk about the growth algorithm from here, you folks have laid out some pretty interesting targets that feel like there could be potential upside given what the base business was already doing before RNG. So can we just talk about the opportunities that you folks might have to be towards the high end of that range and what it would take to get there?

Thanks, Jerry, and thanks for the recognition over the last 4 years. Yes, we've historically said 5% to 6% EBITDA growth a year. And Ed, keep me honest here, but I think the last 4 or 5 years, it's been north of 8% or 8.5%. And I think when you talk about the investments we're making on the sustainability front on top of that with respect to RNG and what we're doing in the recycling business, you really get to some compelling growth numbers over the next [ 10 -- 4 ] years as we go through '26 and get the full benefit of the investments in automation, we're making on the recycling side in addition to the investments on the RNG side, I mean it's $2-plus billion of investment capital we're really excited about.

And the really interesting part of the journey -- I was telling Ed this last time when we caught up, you hear about efficiency gains in a lot of companies. It doesn't drop down to the bottom line in a lot of companies. So 20 basis points of margin improvement per year for you folks over the past really 10 years. Can we talk about the efficiency part of that equation. So you folks are automating the customer service experience, we're talking about automating residential routes? How does that factor into the opportunity side, John?

So it's important. We've -- kind of 3 major buckets. But we've said publicly, listen, the labor market is not getting any easier, especially for some of our frontline jobs in our collection business, technicians, recycling, facilities, et cetera. And so part of it is really a labor arbitrage issue, which is, we said we think going back 18 months to 2 years ago when we started, we probably got 5,000 to 7,000 roles that we can eliminate the need for which is different than eliminating the role, right? Because over time, through attrition, we're not going to hire those roles back. But the reality is, is part of the reason we're doing that is the arbitrage piece, which -- I've been in this business my whole career, starting out on the back of a truck, way back when, driven a truck. A lot of those folks don't line up the same way to come work in those same roles. So part of what we're doing through these investments in technology and automation is to reduce the need for some of those really physically demanding jobs. And that's really customer experience, some of the -- an that's necessarily a physically demanding job, but a role that's become harder and harder to fill in our recycling business, a lot of what we're doing automate these plants, is taking out significant chunks of the manual labor that was traditionally required in these facilities. And then when you look at our collection business and more specifically referenced residential, there's some elements of those roles that are still pretty physically demanding. And with the workforce we have today versus the workforce that's coming in, there's simply not the desire to govern some of those really physically demanding jobs, and that's another reason we're trying to automate our way out of some of those challenges.

And in terms of the margin uplift, as that flows through the P&L, John, what's the benefit that you're anticipating this year? And 2024 from those automation efforts?

Yes. We said from an OpEx standpoint, we thought the first quarter would be about where we ended up in Q1. We were really to see the benefit is in the back half of the year. And I think what was the range for the full year and OpEx.

For OpEx, about 40 basis.

Yes. So 40 basis points. And that's been an area, candidly, it's been a challenge the last hand 4 years. When you look at supply chain issues, labor issues, overall inflation. We've -- I think we've been staring into the wind a little bit more in the last 24 months than we had previously. The good news is, I think what you start to see in Q1 is that we've seen labor moderate. We were high single digits for some of those frontline roles, and we've seen that more normalized down in the 5 or 6 percentage range on a year-over-year basis, which is, in fact, historic normals, but it's a heck of a lot better than it was. We're seeing our supply chain loosen up and more specifically, I said this on the call a few weeks ago. If you go back 3 years coming out of post-pandemic, post-ADS and you look at the challenges, we're probably 2,000-plus trucks behind where we would have otherwise been. The good news is, is that last year, we delivered less than 100 trucks in Q1. This year, almost 400, and we see that improving. And that is really -- when you talk about OpEx improvement, EBITDA improvement, maintenance and repairs and labors are 2 really big buckets where we feel a lot better this year than we did last year.

And John, Ed, another part of the automation plan is around daily route planning. Can you talk about where we stand and the timing of when you expect to roll that out across the enterprise.

So we've always had in-house routing engineers, right? But the challenge has been how in a business and lines of business within the collection business, particularly the industrial roll-off line, which is the most dynamic by far. How do you get the most efficiency out of that line of business and part of it is being able to real-time route, right? And so we do a good job of engineering the routes and setting them out in the morning, but things change, right? And our ability to change with the dynamics of that routing is really what we started to deploy and you've heard us talk about next-day optimization, which ultimately becomes intraday optimization. And that's -- so the good news is we're in -- I think we're in about 45 sites for this pilot. The results have been good so far, that's step 1. That's next-day optimization and then ultimately, we want to get to intraday optimization. So we can react real time. The other technology we've laid on top of that as I send you out with a perfect route in the morning, Jerry, and you get behind the wheel and you're ready to roll. There's construction, there's an accident, there's weather, there's whatever. We've also laid -- these are my words. We laid another technology. We've just started rolling out in the last handful of quarters, which is basically real-time navigation on top of that the engineered route. So I think about it as waste for garbage trucks, right? So I get out, I got my 10 stops as a roll-off driver in the morning and they're all laid out perfectly and then everything else happens. And then these folks will have the ability to get real-time navigation to get through that route in the most efficient way. And we're just in the early innings of that. So there's efficiency benefits there. There's safety benefits there. I mean -- so we're excited about.

Very interesting. And the next day routing, so 45 sites, out of how many waste management sites that will be...

Sites is not important. I think we rerun about 4,000 roll-off routes. And that -- and we're starting it for obvious -- it's the most dynamic line of business within the collection business. When you think about our residential line of business, it's much, much more static and commercial is a little more dynamic, but not quite as roll-off. So we're starting with where the biggest opportunity and the biggest challenge is in terms of getting the technology rolled out.

And so there are 4,000 roll-off routes, and this is on how many of those routes is an issue...

I want to tell you, I'm probably going to give you the wrong number. I want to say it's probably running about 500 or 600 routes right now.

So it's a pretty big truck.

Yes. Yes.

And what are you seeing, John, in terms of the initial efficiency gains on those routes where you're doing the routes?

Well, the real efficiency gain is going to be on intra-day and that's why it delineated between next day and intraday, but we're seeing a few single-digit percentage points on next-day optimization, which is, frankly, what we were looking for. And again, it's not on the whole sample, but the early indications are that we're going to see an initial uplift with next-day optimization, but the real benefit should come when we get to intraday.

And how much of [ tour ] can that be.

I would say it's in the middle to high single digits.

And that's essentially, if I think about that as a number of stops feasible for driver. Is that...

We're going to be -- we're either going to be more efficient with the same assets or we're going to do more work with the same assets. So we're going to -- either way, I think of it from an asset utilization standpoint and creating capacity, if you can get 5%, 6%, 7%, 8%, pick a number, I mean you think about it all the way through from an operating standpoint, from a capital standpoint, that's -- there's efficiencies across all those considerations.

Waste for sanitation sounds pretty good.

Yes, it's my word. It's not a waste product. It's just the way I think of it.

Can we talk about capital deployment. So the M&A environment today and the pipeline versus stock buyback versus dividend growth, how do you folks consider the moving pieces?

Okay. We've been -- we've always looked at it from how we're going to deploy capital and we talk about dividend being paramount payout ratio in that 45% to 50%. And then next, we've looked at M&A and then share buyback. And that's been pretty consistent and we'll continue to do. I think the one thing that's different over the last handful of years is really the $2-plus billion we're allocating to the sustainability investments over $1 billion in the renewable energy side, and we'll get up to 28 million MMBtu all in when we get to build out all this incremental capacity. And then what we've done on the recycling side. We've talked a lot for some who probably saw the Investor Day that Tara and team put together for April -- last April 5. I thought did a lot to kind of clarify, a lot of questions we continue to get there. But that's probably the one, if you want to call it a deviation is the fact that we've -- and by the way, we've said conservatively, the payback on these RNG plants is about 3 years, and it's about 5 to 6 years on the recycling plants compared to -- you were doing M&A even when you look at it from a post synergy standpoint at 7, 8, 9x, pick a number, these make a lot of sense to us. I think that doesn't mean we're not going to do, obviously, M&A. I think we did a little less than $400 million last year, continue to keep our eye and try to be disciplined in what we do there. But I think some of the things we talked about earlier around cost pressure, supply chain issues, labor issues, et cetera. We've seen a little bit of additional buzz, if you will, about folks who are probably thinking about if they want to recapitalize their fleet, can they get the labor? Can they fight through the supply chain issues or is now the opportune time to sell for them.

And for under $100 million deals, it's pretty straightforward. What about for larger deals that would trigger that regulatory review, is that less interest for you folks, given what we've seen.

I smile because I don't know if it's of less interest, but I got a full dose of that when we did the ADS deal. So we got a chance most recently to go through that process. No, I think we're eyes wide open. I don't think it deters us. I just think it's another consideration. You need to be prepared for if you're going to fall into that HSR category.

Yes. Yes. They're making that process not so enjoyable. On the landfill gas side, what's interesting is part of your truck conversion plan is going to soak up a big chunk of the gas that you're set to come online. So at least mathematically, it feels like you could absorb 15 million MMBtu just within your fleet. Is that right? Is that consistent with your use plan?

I'll start, and then I'll keep my math accurate here. So right now today, 75% of our fleet on the street is running on CNG, about 35% of that, 40% of that is running off RNG and a chunk of that is ours. The reason I bring it up is we have -- as we bring these plants on, we have the ability to close the loop on a lot of our fleet. And we're not done at 75%. We think we can probably get up into the 90-plus percent range in terms of CNG. And that's not because we wouldn't go further. There's lot of benefits to it, notwithstanding the RNG benefit most recently, but there's just availability of gas becomes a challenge in some areas. So -- but by and large, we think we'll be virtually all CNG here in the next handful of years, and we will have the ability to fuel theoretically all of our trucks with our own RNG, and Ed will keep me honest here on how much additional gas we have potentially to sell after. If we were to put it all in our fleet, which we're not committing to do that because there's other options, fixed price contracts, non-transportation-related, sale of that gas.

I think that's what John's point is a good one here, right? We have a lot of options on here. We want to keep them the flexibility of what we're doing. So yes, we could fuel our entire fleet by 2026 with our own RNG but there are other considerations. You have a low fuel carbon standard -- you have low carbon fuel standard sorry, in different states that give us credit for using lower intensive carbon score fuel like dairy and swine barn. So we can continue to do that and reap the benefits of it. And then to mitigate some of the fluctuations in the price volatility that you could potentially see, we can enter into some contracts with the voluntary market, large university systems or industrial users that want to reduce their carbon footprint. So they'll buy the gas from us and it's not as volatile market as kind of depending on the RIN sales.

And that's a really interesting point about your current LCFS use. Can you talk about that. Out of what proportion of the gas that you're using are you getting benefits from that are not related to your own gas.

It's hard to say, right? I mean mostly it's in California right now, Oregon has some of it. I think in Washington, it will populate across the U.S. eventually. It's really in those specific markets where it's available that we're doing it. And obviously, California is a pretty big market for us. So we get a lot of that there.

Got it. Okay. Super. And then in terms of the opportunity to develop additional landfill gas assets beyond this initial 2026 plan. Can you talk about how you folks are thinking about the reserve life that we could ultimately be looking at? And what could the development time line cadence be like for the rest of the portfolio? In other words, are we setting up teams that can do 3 plants per year going forward on a run rate basis? How should we think about it?

So thankfully, our group got way out in front of this in terms of -- we made this investment to get up to the 28 million MMBtus with the plants we've already talked about. So supply chain hasn't really been an issue for us. In fact, there hasn't been an issue. But with any kind of regulated facility, including an RNG plant, some of what you have to kind of fight your way through is permitting and zoning in, connection lines and all those kind of things. But we feel good about where we told everybody we would be in terms of plants coming online on time by 2026. And as you can imagine, there'll be some small puts and takes that none of us could have thought about at the time, but I think by and large, we feel good about where we're going to be at the end of '26. And I think at the end -- by the time we build all these plants, we get up to about 65% of that gas being beneficially reused which asked the question. There's still another opportunity for that 35%. We look at it as an opportunity. I'm not sure we put a pen to paper here in terms of exactly where that -- where we're going to try to monetize that. But as I've said, we've got a lot of optionality here. I think for us, from a -- certainly from a balance sheet standpoint, from a technology standpoint, infrastructure standpoint, team standpoint, we feel very good about doing this in-house. And we've had some earlier sort of one-on-one meetings. And one of the things I reminded everybody is RNG is a different technology to manage the gas that we've been managing out of these landfills for decades. We've got 60-something landfill gas to electric plants. I know that leads into the whole e-RIN discussion. I wasn't going there. I'm trying to jump you there -- jump the question. But the point is, is that when we look at managing the environmental controls that come with a landfill, liquid and gases are 2 of those things we've been doing, I think, exceptionally well for years. This is, as I've said, the gas comes out of the landfill, it makes the right, and goes to a gen cent. We make electrons or it may go left and end up being molecules we put back on one of our clean field trucks.

Sounds good. Let's talk about recycling, we can circle up on the e-RINs. But on recycling, John, really interesting implications from the program that you folks have to improve productivity. So essentially, excluding expansion investments, we're talking about $140 million of incremental EBITDA, which essentially means that the trough of the cycle, recycling line of business is going to be delivering north of 20% margins, pretty interesting dynamic.

The challenge for -- anybody who's been following the industry from some time is recycling -- when the commodity prices are good, recycling was great and the inverse was also true. And we rode up and down on those commodity fluctuations for some time. And then I guess it was probably about 5 or 6 years ago, we really said, listen, in order for recycling to be sustainable, it's got to be economically sustainable. How do we do that? And at the time, anybody who was in the recycling business was taking all the operating risk, the capital risk and frankly, the commodity risk. And that was clearly an imbalance we weren't happy with. Again, it was really good when it was good, and it was really bad when it wasn't. So we set out to say how are we going to make recycling a resilient business. And we said this, we have to rebalance the relationship between us and the customer in terms of risk/reward. And if you've been to a recycling facility, it's a manufacturing facility. Heterogeneous material goes in, homogeneous material goes out. And there's got to be end markets for it. I think that's another reason why we feel good about recycling is I think receptivity and the demand by the customer end is continuing to increase. But the position we took is we want to be paid a fair margin and a fair return to process the material, so we're manufacturing operation. And then from there, we can decide what the right relationship is between us and the customer in terms of kind of what's left over. And I think what you've been seeing for the last handful of years and certainly the last handful of quarters, is as we've invested in these facilities, we've taken a labor intensity down by as much as 30%. Operating expense is down by anywhere 15% to 20%. And even in a $54 market, which is what Q1 was for us, those -- recycling performed well, and those automated plants performed much better than that. So we feel really good about those investments. And that we're going as fast as we can there, but it takes some time to rehab one of those facilities.

And you obviously get the most bang for your buck out of rolling out at your biggest facilities first. Is there another layer after this $140 million benefit? Is there a next layer that you folks would evaluate in terms of smaller plants that are feasible to move forward?

You bring up an important number there because the $140 million is the piece of the EBITDA that's unrelated to anything that has to do with commodity price, right? That was really throughput of the plants that improves with this technology and simply the labor efficiency. I think the overall number was over [ $220 million or $240 million ] -- so I'm sorry, finish the last part of that question.