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

Okay. Good afternoon, everyone. I'm Jerry Revich from Goldman Sachs. I'm delighted to have with us the team from Waste Management, immediately to my right is Devina Rankin, EVP and CFO; Rafael Carrasco, Senior Vice President of Operations. And we have Ed Egl, Senior Director of Investor Relations. Devina, Rafael, Ed, thank you so much for joining us.

Happy to be here.

Maybe to start the conversation, looking back at Waste Management over the past 5 years, a really strong growth profile, 10% growth in earnings like clockwork, pricing, margin expansion, acquisitions. Can you talk about internally how you folks have been able to drive that level of performance and the key performance metrics that you folks have set up in the organization to drive that level of strong growth over the past 5 years?

Yes. I would say that it comes down to consistent execution of an organization that's focused on taking care of its people, its customers and knowing that it plays an important role in the environment. And what does that do to translate into earnings and cash flow growth. It's really starting with the top line and thinking about our ability to take our advantaged landfill network and commitment to recycling infrastructure and leverage that competitive advantage in the disposal or post-collection part of the business to price at the curb and see that value all the way through. So we target on an annual basis long term, that target has been 4% to 6% revenue growth organically and translate that to 5% to 7% EBITDA growth because you combine the pricing power of the business with our focus on continuous improvement and optimization through things like automation and efficiency, whether it be transferring our residential routes from the historical rear load to an automated side loader or improving productivity through using diligent routing processes that are more digitally enabled. Those are the sorts of things that are driving efficiency in the middle of the P&L. Back office has been an important part of that as well. So discipline in SG&A spending, using technology more efficiently to guide the business in the back office and combining all of that to generate that outpaced growth in EBITDA relative to top line growth is really the muscle behind the equation. It's the hard work and the grit of the business. And then you translate that into capital efficiency and you can take the 5% to 7% EBITDA growth and get 6% to 8% increases in free cash flow growth over the long term. We've outpaced those levels of growth the last 5 years, outpacing it has come mostly from organic contributions. though certainly, the 2024 story has been exciting when you think about sustainability growth investment as well as the investment we've made in the Stericycle acquisition, which I'm sure we'll talk a good deal about and still healthy bolt-on acquisitions in traditional solid waste.

Hey Jerry, Devina covered that beautifully. But one thing that I do want to add is, really having the ability to drive ownership and accountability for the business and the performance of the business all the way down to the business unit is something we pride ourselves on. We do that very effectively. And what it does is it breaks the silos between operations and sales and commercial efforts in a way that it drives disciplined growth and everybody knows where they stand all the time.

And Rafe, can you expand more on that point in terms of, to what level do you have individual P&Ls?

Yes. All of our business units, whether it's a hauling district or a transfer station, a landfill, they have specific targets they have to meet. They have performance improvement metrics that they have to manage to. They have goals to their own budgets. And when they're falling behind for some reason or another, there's EBITDA enhancement programs that get place and people own them in those districts themselves.

Very interesting. And in terms of the proportion of the business units that are hitting their targets this year, how does that look?

I would say the business has knocked it out of the park in 2024. There's not really a part of the business that has underperformed our expectations. The one kind of caveat to that is some of our renewable natural gas projects have come online a little later than we had projected at the beginning of the year, but there's not an underperformance of the business. It's just things that were outside of our control like interconnect construction and things like that. So across the board, in the traditional solid waste business, our units are really driving significant growth. And it starts with customer service. And I think those folks commit to caring for our customers on a day in and day out basis for the definition of essential, so...

And in terms of the route improvement, especially on the industrial side, that's been a key focus for you. Can you just talk about where we are with those initiatives? I think you started pilots maybe 2 years ago, if memory serves. Where are we in that rollout process and benefits?

Yes, that's a great question, Jerry. So we call that NDO, next-day optimization. And we are about maybe 90% now deployed across most of our hauling districts on the industrial line of business. We are now testing pretty extensively cross -- dispatching across different sites, which is going to even give us a greater level of efficiency. And we haven't yet touched commercial and residential. And so that's upside still to come.

So what's really interesting in what Rafa just mentioned, if you think about cross-site opportunities in the industrial part of the business, in particular, if you think about the city of Houston as an example, right, we can have hauling operations in 2 different parts of the city. And historically, it was district-led in terms of a site would address all of the things that were in their part of the city map. Well, now we're going to be able to cross district by district based on the availability of assets and drivers across metro areas, and that's going to give us better efficiency across our own network.

And the benefits that we've achieved by doing this, 90% through, how much have margins improved?

That's an interesting question because, I mean, when we first were deploying this, we were expecting somewhere between 4% and 6% efficiency gains. We actually got to achieve those in 2023 and into 2024. What we saw in 2024 was a little bit of a change in mix of our industrial business. So it makes it a little murkier. So some of the open top business, which is what requires the most dynamic routing kind of tailed off probably as a result of people waiting for the outcome of the election, some of those projects that require open tops kind of fell back. On the flip side, we saw a pretty robust, healthy compactor work remain. And as you can imagine, that compactor kind of switch out work is less efficient inherently. So you have a little bit of a mix issue there. What I could tell you, and we just recently had an update from our business optimization team on this front is that, had we not had NDO in place, we would have seen a fairly significant drop in efficiencies as opposed to a nominal one.

Interesting. And Rafael, you mentioned there's a plan to roll this out in residential and commercial. Can you just expand on what the benefit is because it sounded to me like you've set your routes for industrial at 2:00 a.m. or my Godly hour. And so what's the benefit where it's fairly predictable in residential and commercial of rolling...

Yes. Good observation. The industrial routes are a lot more dynamic by nature. However, you can imagine that when you have a commercial route, for example, that might have 60, 70 stops, maybe 100 stops and all of a sudden, one of those drivers doesn't show up and there wasn't much notice, then you end up having to redistribute all that work across as many drivers as you have available, sometimes not very optimally. So having the power to use the algorithm to actually do that in the most effective fashion is what brings the results.

Got it. And how frequent is that? Is that ordinary course of business? In other words, is the...

I would love to tell you that we have 100% attendance in every district every day, but that never happens.

Interesting. So it sounds like there -- I mean, this could move the needle for you.

Definitely.

And the other areas that we've spoken about, call center automation, rear loader automation, what's the benefit that we're expecting from these initiatives, '25 versus '24?

So on the call center front, we had really completed most of that work at the beginning of 2024. So there's not a rollover benefit into 2025. The metric that's most important there is thinking about SG&A as a percentage of revenue. And historically, we used to be above 11% on that metric. And now we're close to 9%. And for us, it's about sustaining that even in a more technology-driven business model because technology is expensive, right? And so finding a way to ensure that we can maintain that long-term target of about 9% and find margin where we can beyond that is the goal, but no rollover benefit from call center optimization in 2025 anticipated. On the residential front, though, there is continued benefit there. We're about 40% of the way through in moving from rear load to side loader. And you combine that with all of the intentional shedding that we've been doing, the focus on investment in the fleet, all of those things have provided significant increase in the margin of the residential line of business, and that continues into the year ahead. We target 50 basis points of margin expansion a year in traditional solid waste, and we think that we'll get that again in 2025. There is a caveat to that associated with whether or not the alternative fuel tax credits get renewed. And if that doesn't get renewed, it's about a 30 basis point headwind. But when we can take good price/cost spread that happens organically in our business, even with the human capital intensity of traditional solid waste. We know that we're doing the right thing by continuing to use that continuous improvement mindset that exists within WM to grind out incremental margin and improving the cost to serve does then create incremental opportunity when you think about things like the tuck-in acquisition, pipeline that exists for solid waste acquisitions that we have seen incremental growth from in the current year, and we expect '25 will be another outpaced year.

And Devina, how are you thinking about the cadence of inflation heading into '25?

So for us being human capital intensive, we really focus on inflation mostly on the labor line. And the labor inflation rate that we're anticipating is in that 4% to 5% range and 4% to 5% feels very normal for us. So certainly off the peak levels. The question mark for us is what happens with the impact of tariffs on the broader economy? And do you start to see a higher-for-longer inflation level than what maybe we were anticipating, seeing things really moderate in 2024 at nice levels. It's really difficult for us to specifically predict. But what I would say is we're certainly off the peak, and we're at a level where we know that, that 4% to 5% wage inflation, focusing on that pricing at a level that we can recoup that in our pricing activities and then with efficiency, drive the equation to produce the 50 basis points of margin expansion is ultimately the objective.

And within that, we've had cargo prices decline last month. Obviously, you folks have improved the pass-through mechanism over time, but there's still earnings variability related to it. As you think about setting the point on price for the entire business, do you take into account the risk of cargo price volatility moving the wrong way and making sure we can still achieve the 50 basis points?

We do. So in terms of commodity prices, it's just part of our equation, and we do what we need to in order to drive a fee-for-service model. And fee-for-service is ultimately what provides predictability to the earnings profile of our business. We used to have much more volatility associated with some of those economic drivers, and we've worked really hard to remove some of those impacts and continue to see consistent profitability through all of the economic cycles, which is great.

Yes. The other piece of that, and Devina didn't touch on it, but the third leg of the stool, if you will, on the automation journey was the MRFs themselves and our recycling processes and so forth. We're further along there. We're maybe about 70% there, and we're seeing tremendous benefits there, maybe 30%, 35% cost efficiencies across the board compared to our old MRF, right. And the additional piece of that or benefit of that is higher quality content at the end, better commodities, right? So that helps offset some of that commodity volatility on the negative side as well.

That's a really good point Rafael. So how much higher is your price realization from the higher quality commodities?

It varies in the 10% to 20% range, and it's really dependent upon commodity stream. So you can see that being more significant in plastics than it is in paper. So in plastics, it's really about the fact that we can source separate and drive higher value from lack of a bundled bail in today's environment. So we have cleaner and more kind of specific product...

Homogeneous...

Yes, homogeneous is the right word, homogeneous products that can be delivered to customers, and that lifts the price.

Higher degree of purity, I would say, and I hesitated to answer the question because it's not only -- it's also -- it can even vary on the customer-by-customer basis. There are some -- it now expands our ability to reach other markets as well.

Very interesting. And so the pricing part of it, correct me if I'm wrong, I don't think that was factored into the business case for it. I think that's upside, right?

So it was definitely something that we expected. What I would say that our business case was based on better throughput, so volume-driven, incremental earnings because of a reduction in labor costs and then ultimately, the price associated with the better quality product. So those were the 3 legs that we drove our business case on.

And Devina, to this order of magnitude, 10% to 20%?

No. We certainly are outperforming what we expected. And so what that speaks to is the investment that we've been making in recycling infrastructure. We talked about a payback period on these investments in the 6- to 7-year range. And recycling infrastructure has been one of the things that's got an economic value and an environmental value. The environmental value without question because we're creating access to better recycling infrastructure across North America. The economic value, people have questioned over time. And what I would tell you is recycling is now on par, if not ahead of some other aspects of the traditional solid waste model in terms of both profitability and margin and returns.

Even margin, even percent margin.

Margin has pulled ahead. Yes, it's performing very well. Not relative to the landfill part of the business, right? So landfill is certainly king in terms of margin performance.

Yes. But the MRFs are pretty high capital velocity, so the margins are attractive. And so when you're going to complete the current upgrade program, what proportion of your recycling footprint will still be old tech, if you will, where you have room to upgrade?

That's a good question.

I would tell you that the program that we built was about 2 things. It was about upgrading the existing infrastructure for single stream specifically, and we'll be effectively through that at the end of this program. The other was about building new infrastructure. And the building new infrastructure, we had targeted market-based investments that we wanted to make. Austin, Texas is always one of the most obvious examples that I think is valuable for people because when you look at the state of Texas, Austin is certainly the most green in terms of consumer demand for recycling as a service. and yet they were under-invested in from an infrastructure perspective. So we were very targeted at approaching markets that we felt were underserved. And we feel like that one, it's difficult to decide or to determine what inning you're going to be in, in that regard because we see demand for recycling infrastructure growing. And a great example of that is what's happening with end producer responsibility moves and Canada is a great example where WM has set itself apart in the marketplace with regard to the investments that it's made in technology and infrastructure and the ability to actually improve recycling as a viable environmentally sustainable process, and we are investing in new projects there that really weren't contemplated when we started this initiative just a few years ago. And so we see the growth coming from demand for incremental infrastructure from here.

And maybe we should -- if we could shift focus to Stericycle. So you folks have built a tremendous track record of bringing down SG&A, pushing pricing, 2 things that are really needed at Stericycle. Can we talk about the pricing part of the equation? Historically, they've struggled. They've had negative pricing. What are your impressions of the drivers of it and the level of confidence that we can push pricing on that part of the business?

Sure. I think it's important to kind of look at the Stericycle sort of history comprehensively in order to understand kind of where they are and what the difficulties are, right? And so you think about that business growing in the way it did, expanding geographically into places that maybe it really didn't need to be in, adding services to a portfolio that maybe weren't really contributory to whatever the mission was. They, over the last maybe 5 years, have engaged in a process of actually reducing that and rationalizing that. At the same time, they were contending with pricing consent order associated with sort of the lack of -- when somebody we were talking to earlier referred to like the lack of development of a disciplined pricing muscle. I would actually characterize it as a little bit of a misdevelopment of that, right, which ultimately resulted on that being atrophied. And so what happens is you have an organization that wasn't quite focused on really quality of revenue and customer centricity. They were focused on divestiture of a lot of things they didn't need to be a part of. They were focused on a lot of regulatory concerns. And then, of course, then they were focused on the implementation of the ERP without much, much note to the pricing components. What we bring to the table is actually a much more disciplined approach to that, really emphasizing quality of revenue, really emphasizing kind of how we're going to get to the customer. We -- one of the things I like to kind of compare and contrast with the way that the Stericycle customer base behaves is our national accounts work, which we've enjoyed tremendous success with, right? So -- you think about the way we've driven double-digit CAGR in that side of the business with healthy margins. You think about how those national account customers behave, it's very much a parallel with what those large acute care networks around the country and those national chains behave. And so we've been capable of actually driving really business performance, price and customer experience across that customer base. We think we can do the same within the Stericycle customer base.

And Rafael, for companies that don't have the pricing muscle, what has to happen is they'll have a mix of business that's profitable and then some routes or some customers that are not. Is that the case here, so we really have to address the tail?

It's really early stages now, as you might imagine, but everything that we see is indicative of that being the case. We have some business that maybe doesn't make a ton of sense. And by the way, I'm sorry, let me -- one more point to make is that you also sort of have a tendency to -- when you're focused on all these externalities, you have a tendency to lose track of kind of what your service offering and your product line should look like. And maybe we're looking at an organization that had a very expansive suite of offerings that maybe could benefit from actually tapering down, rationalizing and becoming much more targeted.

What you measure, you manage. And we started the conversation talking about what a great job WM does of holding its businesses accountable for site profitability, line of business profitability. I mean we measure tremendous amounts of detail across our organization but with purpose. And one of the things that we found in the early days of owning Stericycle is that there's a lot of opportunity to be more disciplined with regard to what we measure and holding management local management and consolidated management accountable across the organization for customer-centric driven pricing activities that will lead to profitable growth. And we're really excited about that, but it is early innings.

It's important to say this though, Jerry, and I'll say it. What -- there's a tremendous amount of talent there, people that are committed to the cause. And what we need to be able to do is give them the tools and the technology and the form in which to kind of show that in a winning way.

And from a timing standpoint, they have multiple ERP systems. You folks have the visibility that you do in your business because that's how you evaluate the teams. Can you make changes quickly in that organization? Or are we waiting for the ERP system to be integrated on WM system before we can really aggressively push for that level of improvement?

So the ERP journey at Stericycle has been one that's gotten a great deal of attention, and we were seeing and reading and hearing all of the same things that other investors and interested parties were seeing, and that's that this was a protracted effort and one that was expected to create a great deal of opportunity. And what we knew is that we were seeing an organization that was at the doorstep of being able to unlock some of that. I think that we're as excited, if not more excited about what that opportunity looks like. The time line to realize that opportunity is a little different. So in terms of thinking about the value creation from the Stericycle acquisition, we talked about $125 million of annual synergies once fully realized and captured. And our expectation was that, that was about a 3-year time horizon in order to be fully captured. We're not at a point where we can tell you whether or not we'll get there quicker or not. But what I can tell you is that we think the $125 million is conservative. What we know we need more time on, though, is optimizing the way that the ERP can be leveraged as a tool to run the business to have customer-centric insights to optimize processes. Technology is only one leg of the stool. It really is about people and process. And we think that they invested in the technology without really, at the same time, connecting people and process. And what we're excited about, to Rafa's point, there's tremendous talent on that team, and we're really excited about taking WM's approach to connecting people, process and technology in order to unlock value. We will not be integrating the Stericycle systems onto WM systems. They implemented an SAP platform, and we run on an Oracle shop. And so we'll integrate things behind the scenes from a consolidation standpoint. So that will limit some of the SG&A synergy opportunity, but we anticipated that going in. really think that there is significant upside on SG&A rationalization over the long term, but that's not something that really drove the value of Stericycle as an acquisition for us. It's all about that platform, its platform of service to customers in the health care space and the platform of disposal assets that they have.

Adding one more important point to that. So when Devina talks about the upside on $125 million worth of synergies, keep in mind that, that doesn't account for any cross-sell synergies, right? And we're -- we feel very comfortable, we're already evaluating those. And if you just look at kind of what our mean market share on our typical commercial and industrial segments, for our solid waste business. We're meaningfully underrepresented in the health care space, and we see a tremendous amount of opportunity there.

And what I've heard from other companies is in this industry, because the value of picking up [ trash ] is so low versus SG&A, essentially, you can price at a premium by bundling products. Is that the expectation here?

I think folks -- I take you back to kind of the notion I offered around national accounts. I think folks are going to be looking at one service provider, less so about the bundling itself and more about, do I have the benefit of actually dealing with one provider and what are the reporting capabilities and what sort of sustainability offerings does that player bring to the table? And I think we stand above the rest in all 3 of those.

And Rafael, how significant could the cross-sells be? What's the blue sky scenario?

I think we're still quantifying that, but we like it.

And in terms of where you folks benefited from over the past couple of years, when Republic bought US Ecology, they raised pricing by 10% quickly, then 10% again. Your approach to Stericycle, is it going to be similar? Hey, we've just got product lines that are just priced at the wrong point. So January 1, we're going to have a 10% sort of price increase? Or how are we managing part of the business that doesn't make economic sense?

Yes. I mentioned customer centricity. I think the first step is to really engage with the customer base and find out what services they really want and need before we decide what can be priced and how are we going to price it accordingly. We have a lot of experience engaging with sophisticated customers, and that's what we've already begun to do. But we think that, that will yield an immediate action plan after.

And what's the timing of price increases in this business? Is January 1 a heavy period? Or is it scattered like your C&I business?

I think it's mostly contractual, frankly, and it depends on kind of when the contract -- the inception of the contract.

Got it. Very interesting. If we could shift the conversation to the landfill gas part of the conversation. Obviously, we're seeing D3 RIN prices come down off of a high base. What are you folks hearing in terms of from your customers in that line of business? And what are you hearing from utilities? Is there angst around locking in utility prices given the volatility on the D3 RIN side recently?

So the recent volatility, I think, is certainly in response to the presidential election and what happened there and the uncertainty with regard to policy decisions that will be made. But I think when you step back from policy decisions and think about the fundamental that underlies this market, and that is demand for renewable energy. And we see that as something that will be consistent over time. And as a reminder, we had set our expectations for D3 RIN pricing at $2 when we made the decision to make this significant investment. And at recent levels, we're talking $275. So there's still a very healthy premium relative to our initial outlook for this business. We think that, that continues, and that's because there's voluntary participation in the marketplace that we expect to continue.

Super. On the rail network, so you folks recently acquired Winters Brothers. Can you talk about where your rail network sits today in terms of what proportion of your volumes are served by rail? And how significant is the opportunity to scale that for you?

Yes. So the Long Island market and specifically Winters Brothers is a little bit of a separate conversation. That's a complex and ever-developing situation with respect to railing out of Long Island. But from a broader perspective, Jerry, what you see is we are beginning to apply decision sciences and data analytics to actually figuring out where there's going to be constraints and pain points in landfill capacity moving forward. We got to make use of this expansive network of landfill assets we have across North America. We're better situated to do that than anybody else. And we now have advanced modeling that can take -- tell us where should we be looking to start actually developing lanes. We've enjoyed some success this year doing that, already moving some volumes from the New England market area, which is practically impossible to expand or site a new greenfield landfill into Midwest assets, specifically in Indianapolis. We reached pro forma in less than 4 months in that specific effort. So there's a lot to continue to develop there. We think there's going to be a lot more opportunity.

Super. Well, with that, Devina, Rafael, Ed, thank you so much for joining us. Enjoyed the conversation. Thank you.

Thank you for having us.

Thank you, Jerry.

Thanks.