Waste Management, Inc. (NYSE:WM) Q4 2023 Earnings Call Transcript

Waste Management, Inc. (NYSE:WM) Q4 2023 Earnings Call Transcript February 13, 2024

Waste Management, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the WM Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Egl, Senior Director of Investor Relations.

Edward A. Egl: Thank you, Josh. Good morning everyone and thank you for joining us for our Fourth Quarter and Full Year 2023 Earnings Conference Call. With me this morning are Jim Fish, President and Chief Executive Officer; John Morris, Executive Vice President and Chief Operating Officer; and Devina Rankin, Executive Vice President and Chief Financial Officer. You’ll hear prepared comments from each of them today. Jim, will cover high-level financials and provide a strategic update. John, will cover an operating overview, and Devina will cover the details of the financials and our 2024 outlook. Before we get started, please note that we have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com.

The Form 8-K, the press release and the schedules of the press release include important information. During the call, we will hear forward-looking statements which are based on current expectations, projections or opinions about future periods. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are discussed in today’s press release and our filings with the SEC including our most recent Form 10-K. John, will discuss our results in the areas of yield and volume, which unless stated otherwise are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John and Devina will discuss operating EBITDA, which is income from operations before depreciation and amortization.

Any comparisons unless otherwise stated will be with the prior year period. Net income, EPS, income from operations and margin, operating EBITDA and margin, SG&A expense and prior period operating expense results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to our earnings press release and tables, which can be found on the company’s website at www.wm.com for reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. This call is being recorded and will be available 24 hours a day beginning approximately 1:00 PM Eastern Time today.

To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today’s call, which is occurring on February 13, 2024, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now I’ll turn the call over to WM’s President and CEO, Jim Fish.

James C. Fish: All right. Thanks, Ed, and thank you all for joining us. The WM team delivered a remarkably strong finish to 2023 driving fourth operating EBITDA 15% higher. This accelerated earnings growth led to full-year operating EBITDA that exceeded the high-end of our most recent guidance range by nearly $25 million and achieved the midpoint of our original expectations from the beginning of the year. Our strong financial results for both the quarter and the year were powered by our collection and disposal business. This performance starts with disciplined organic revenue growth that exceeded our expectations. And once again, our success in managing the middle of the P&L really stands out in our results, as our teams continue to make progress in optimizing our cost structure with the help of technology and automation.

When you combine our revenue performance with the improvement in operating costs, we saw widening of our price-to-cost spread and increased profitability. Operating EBITDA margin reached a record 29.9% in the fourth quarter and full-year margin expanded 90 basis points 28.9%. As 2024 kicks-off, we’re confident that our continued focus on optimizing our cost structure and executing on sustainability growth projects sets us up for another year of outsized growth. We anticipate operating EBITDA growth of 7.7% at the midpoint of our guidance, which translates to more than $450 million of which $115 million comes directly from our sustainability growth investments. We remain excited about the economic and environmental benefits of expanding our renewable natural gas and recycling platforms.

Our execution is tracking well and we expect to commission five new renewable natural gas facilities by the end of the year reaching 30% of our run rate renewable natural gas volume growth. We’re also on-track to complete automation upgrades at 10 recycling facilities and add three recycling facilities in new markets in 2024. Turning to capital allocation, you’ll hear from Devina, on this topic in more detail, but I want to stress our confidence and our ability to continue to allocate capital to all of our priorities. This includes investing in our high-return sustainability growth projects, acquiring accretive businesses and returning cash to shareholders through dividends and share repurchases. Our tuck-in acquisition pipeline is robust, and there are some indications that 2024 could have heightened activity in this regard.

We’re committed to a disciplined approach to acquiring companies ensuring that any deals we pursue yield appropriate returns particularly given the high-returns in sustainability opportunities. In closing, I want to thank the entire WM team for another great year. We were just at the WM Phoenix Open last week and I’ve said before, we work hard for this event to create a representation of the bigger company with a central focus on people and the environment. We’ve been the title sponsor for 15 years now and the tournament’s been recognized as the largest zero waste sporting event in the world for 12 years running. It makes me proud to see the WM team out there making waste diversion operations run smoothly and demonstrating our sustainability leadership so well.

I look forward to working with this great team in 2024 as we continue to drive growth by executing our operating plans and progressing our investments in technology, automation and sustainability. I’ll now turn the call over to John, to discuss our operational results.

John J. Morris: Thanks, Jim, and good morning. We’re more than pleased with the strong operational performance our team achieved in 2023 showing continuous improvement throughout the year with standout results in the fourth quarter. During this period, operating expenses as a percentage of revenue improved 240 basis points year-over-year landing at 60.3% and marking our second best quarterly performance ever. This improvement was primarily fueled by our collection and disposal business benefiting from the robust operating leverage of our strategic cost optimization. Our proactive measures to accelerate and improve cost efficiency included leveraging technology to manage labor, managing repair and maintenance costs and optimizing our overall cost structure.

These initiatives led to a substantial improvement in WM’s cost to serve metrics, bringing estimated unit cost inflation to low-single-digits by the fourth quarter. When combined with solid results from our pricing initiatives, we greatly enhanced overall margins. Our strong second half performance translated into full-year operating expenses as a percentage of revenue of 61.7%, an improvement of 70 basis points. That momentum has carried into 2024 and is evident in our January results even as we face severe weather in some areas we serve. Two of the key cost categories driving our operating improvements are labor and repair and maintenance. On the labor front, this begins with our persistent focus on reducing turnover. In the fourth quarter, we achieved a noteworthy milestone as driver turnover reaches lowest point at 18.4%, showing improvement as the year progressed.

Additionally, our strategic automation initiatives are yielding positive results in collection efficiency with all three lines of business improving meaningfully in the fourth quarter compared to last year. The results of our technology and automation investments gained traction in the latter part of 2023, leading to significant strides in labor cost management. We expect this to continue into 2024 as we broaden the deployment of our tools across additional sites. Turning to repair and maintenance, with a full lot of trucks received in 2023, we successfully removed over a 1,000 excess assets from our operation, improve the age of our routed fleet and reduce truck rental utilization by nearly 60% since the beginning of 2023. Throughout 2023, our emphasis remained on streamlining maintenance processes, which has resulted in enhanced technician productivity, reduced overtime expenses and diminished reliance on external repair services.

This is paid off in the form of lower repair and maintenance costs in both dollars and as a percentage of revenue compared to 2022. We accomplished all this with an unwavering commitment to safety and by enhancing the quality of our fleet. We’re proud of the strides we made throughout 2023 and look forward to sustained progress. Another core element of the equation that fueled our strong financial results is disciplined organic revenue growth. Growth from price and volume in the collection and disposal business totaled 6.3% for the year, which outpaced our expectations. Our pricing programs continue to be focused on striking the right balance between maximizing customer lifetime value and increasing price to recover higher costs. Our full-year churn rates remain at the lower-end of historical range at about 9% and the year-over-year improvement underscores our consistent delivery of quality service to our customers.

Looking ahead to 2024, we anticipate sustained momentum in our disciplined pricing programs to result in core price between 6% and 6.5% and yield approaching 5%. We remain committed to maximizing customer lifetime value up while securing pricing that exceeds our cost inflation. We’ve seen that spread improve as 2023 progressed and we are confident that our teams are poised to deliver another successful year ahead. Turning to volumes, our fourth quarter collection and disposal volume grew by 1.9% on a workday adjusted basis. Growth was primarily driven by MSW landfill and commercial collection, two bellwethers for demand of our services. Overall growth in landfill volumes was somewhat muted due to the elevated volumes from the Hurricane Ian clean up in 2022.

Some of the recent quarters, residential collection volumes declined modestly due to our intentional shedding of low margin contracts as we work to ensure that we achieved acceptable returns for all parts of our business. You can see the benefits of this focus because while our residential collection volumes declined, total revenue and earnings in this line of business both improved. This is a winning equation and we’ll continue to execute on the strategy in the year ahead. Organic revenue growth in all collection lines of business remains as positive and operating EBITDA continues to grow. In the fourth quarter, new business grew and net services increases remain firmly positive reflecting our quality of service and focused differentiation.

Looking ahead to 2024, our guidance anticipates collection and disposal volume approaching 1%, mirroring the performance achieved in 2023. And finally, I want to convey my appreciation to our frontline teams for their unwavering commitment to delivering safe and reliable service to our customers and communities on a daily basis. It’s their efforts that made 2023 successful and laid the groundwork for growth in the years ahead. I will now turn the call over to Devina, to discuss our 2023 financial results and 2024 financial outlook in greater detail.

Devina A. Rankin: Thanks, John, and good morning. Cost optimization was a significant theme in the fourth quarter and throughout 2023. Our team was pleased that our collective focus delivered WM’s best ever full-year SG&A as a percentage of revenue of 9.4%. The 20 basis point improvement from prior year was realized through investments in customer facing technology, leveraging enhanced back office systems to become more efficient and a continuous focus on optimizing our spend. We’re pleased with the progress made to improve this measure, while at the same time investing in our talent, customer engagement channels and technology capabilities. SG&A optimization delivered 20 basis points of our 90 basis point expansion and adjusted operating EBITDA margin in 2023.

The remaining 70 basis points was from the collection and disposal business, which benefited from a combination of fuel price impacts and operating efficiencies. We gained meaningful traction in optimizing labor efficiency and repair and maintenance costs in our collection disposal business in the back half of the year, lifting our full-year adjusted operating EBITDA margin to 28.9%. This result is 30 basis points ahead of the high-end of our expectations and positions us to continue to deliver margin expansion in the year ahead. Our operating performance translated into robust cash flow in 2023. Our full-year cash flow from operations grew to $4.719 billion and our free cash flow before sustainability growth investments was nearly $2.7 billion.

Each of these cash flow measures finished the year near the high-end of our initial guidance range. This result demonstrates our strong earnings growth, effective management of interest and taxes and optimizing cash conversion and our disciplined capital expenditure management processes. During 2023, we returned $2.44 billion to shareholders, paying $1.14 billion in dividends and repurchasing $1.3 billion of our stock. In addition, we spent $173 million on traditional solid waste and recycling acquisitions to grow our business. We accomplished all of this while accelerating our sustainability growth investments for future growth and development and maintaining our targeted leverage ratio of about 2.75 times. Our balance sheet remains strong and our earnings and cash flow growth are robust, positioning us to continue our commitment to shareholder returns and long-term growth.

Moving to our 2024 financial outlook, we’re anticipating total company revenue growth between 6% and 7%, driven by organic growth in the collection and disposal business approaching 6%. Operating EBITDA is expected to grow by $450 million at the midpoint of our outlook. When we think about the cadence of our growth over the course of the year, we’re expecting collection and disposal growth to be weighted more to the front half of the year, given the momentum we’ve gained from strong operating efficiencies in back half of 2023. And we’re expecting sustainability business growth to be more significantly weighted to the back half of the year as our new recycling and renewable natural gas projects come online. Altogether, we expect this to result in a relatively balanced operating EBITDA growth over the course of the year.

We expect capital spending to support the business for the year to total $2.25 billion of midpoint and we expect to invest another $875 million on our high-return sustainability growth projects. Free cash flow before these sustainability investments is anticipated to grow almost 7% at the midpoint to $2.85 billion. We remain committed to investing in an industry leading network of renewable energy and recycling assets, including renewable natural gas projects through recycling automation and new markets and advancements in resource recovery. Our sustainability growth investment strategy is progressing well. So, as you would expect, there have been a number of refinements to the plan since its inception. We’ve worked our way through customary changes to project schedules and impacts from inflation, all the while delivering completed projects that meet and sometimes exceed the environmental and economic objectives we planned.

These successes have positioned us to grow the sustainability project pipeline. In particular, our refreshed outlook includes two new recycling projects in Canada that WM has awarded through a competitive process. We now expect growth investments across our recycling and renewable energy platforms to total between $2.8 billion and $2.9 billion from 2022 through 2026. We expect these projects to contribute run rate adjusted operating EBITDA of about $800 million by the end of 2026. This outlook utilizes the same pricing assumptions we’ve used consistently, a $125 per ton for recycled commodities and $26 per MMBtu for renewable natural gas. We have a great deal of confidence in the value of the projects that are underway and we’re enthusiastic about the strong complement they provide to our existing business.

In conclusion, 2023 has clearly illustrated that we are driving growth through our diligent focus on optimizing our business, investing in technology and automation, and growing our leadership and sustainability. We take pride in our accomplishments and look forward to what we can achieve together in 2024. A heartfelt thank you to our dedicated team members who have been instrumental to our success. With that, Josh, let’s open the line for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer. You may proceed.

Noah Kaye: Good morning. Thanks for taking the questions. First one maybe for, John. You talked in some good details about some of the cost optimization and productivity efforts and the gains they got this year. Can you step back and kind of remind us and perhaps, Jim, as well where we are at in kind of the broader march towards automation and productivity investments and some of the key KPIs that we should be thinking about in terms of progress for 2024?

John J. Morris: Yes. Noah, good morning. It’s a good question. Originally, we started talking about just in terms of the elimination of some labor dependency in the 5,000 to 7,000 job range. And it was across a handful of pretty broad areas. One, was the customer experience group. One, was through our routing, which would reduce our dependency on kind of frontline driver labor and obviously then recycling a little bit on SG&A. And what I would tell you is, you think about this way, we’re about 75% through what we had planned for the customer experience side on the resi automation and this has as much truck deliveries, which did improve in 2023, we’re about 40% of the way through there. On the recycling side, as Jim mentioned in his remarks, we’ve got a number of plants are going to be automated this year, kind of Jim, can comment more on that, we’re about 20% of the way through there.

So, I would tell you we’re making great progress. I think it showed up obviously across the board in our margins and specifically in labor in Q4 and as the year progressed, but we still got plenty of opportunity out there. We feel like we’re on a good pace.

Noah Kaye: Very helpful. Just trying to think about cadence on EBITDA margins for the year. I know we have the typical seasonality and it sounds like the front half of the year, the growth is really a story of kind of the collection and disposal side. But Devina, are there any sort of guide post you can give us in terms of thinking about margin cadence, either for the first quarter or for the first half?

Devina A. Rankin: Yes, I think it’s a great question, Noah. And similar to what we talked about in terms of the EBITDA dollar growth, the cadence, sorry, for margin is pretty similar. We expect margin expansion to be more heavily weighted towards the front half of the year particularly in the collection and disposal business, the SG&A margin expansion will be fairly even over 2024. But then with regard to the sustainability businesses, the commodity price benefits that we expect to see in 2024 aren’t quite significant, right. They’re pretty muted on a year-over-year basis. But as a reminder, commodity price expansion in the recycling line of business can have some margin compression because of the really high return on invested capital part of our brokerage business.

And, on the renewable natural gas part of the business, we expect margin expansion there too because those are such great margin projects, but those will be heavily weighted toward the back half. So, from a margin perspective, while the collection and disposal business is definitely the thing that delivered in Q4, we do expect that to be the thing that lifts margin most significantly in the year ahead and that will be weighted toward the first half of the year.

Noah Kaye: Great. Kind of a lot of other questions to take offline, but I’ll yield my time in consideration of others.

Operator: Thank you. One moment for questions. Our next question comes from Bryan Burgmeier with Citi. You may proceed.

Bryan Burgmeier: Good morning, and thank you for taking the question. Guidance seems to imply collection and disposal yields growth that you saw in 4Q 2023 will be essentially flat throughout ‘24 kind of around 5%. So, can you just help us kind of understand that, that pricing strength, it was a bit better than what we are forecasting, is it about better restricted pricing starting to flow through, would you attribute that to maybe mix, underlying strength in the market? Just anything you’d kind of call out, on that really sticky pricing that it looks like we’re going to see in ‘24?

James C. Fish: Yes, Bryan, a couple of standouts really were continues to be residential pricing and disposal pricing, those actually showed increases year-over-year. Not surprisingly, the other collection lines of business were down, but that wasn’t unexpected. As we move into ‘24, we think that kind of 4.5% to 5% yield number is a good target for us. And pricing continues to be a strength. We said at the beginning of ‘23 that our focus areas for the year would be pricing and then the cost controls that, John, went through. So, pricing is going to continue to at least add a little bit of margin for us. We think as opposed to ‘22 where we I’ve said several times we kind of felt like we were in hand-to-hand combat with our cost structure.

Bryan Burgmeier: Got it. Thanks for that detail. Yes, last question for me and then I can turn it over. I know in 2023, there was a small decline in the event driven business that kind of prompted a guidance revision mid-year. I’m just wondering does ‘24 guidance assume that comes back? And then if there’s anything else you’d like to flag on the event driven book that would be helpful? I’ll turn it over. Thank you.

Devina A. Rankin: Yes, it’s a great question. And your recollection of our outlook revision mid-year is spot on with regard to some of the softness we were seeing in the special waste part of the business. And, we saw a strong recovery of that in the fourth quarter, which is one of the reasons that we saw revenue exceed our expectations late in the year. We’re not necessarily expecting a rebound of special waste volumes in the year ahead, but we are expecting some of this momentum that we saw in Q4 to carry over, but nothing outsized. The one thing that I would call out as a reminder with regard to some of the special project type work is 2023 did have a benefit from Hurricane Ian volumes particularly in the first quarter, and so that certainly will have an impact on the Q1 comparisons in 2024.

Operator: Thank you. One moment for questions. Our next question comes from Jerry Revich with Goldman Sachs. You may proceed.

Jerry Revich: Yes. Hi. Good morning, everyone.

Devina A. Rankin: Good morning.

Jerry Revich: Devina, I wonder if you could just talk about margins, really outstanding performance by the team in the fourth quarter, if we were to just run the seasonally adjusted annual rate, that’s about over 30% margin equivalent that you folks put up in the fourth quarter, the full-year guidance for ‘24 is about a point lower than that. It sounds like yield is still very much at a good place. So, I’m just trying to make sure that there are no items that you would view as one-off in the fourth quarter versus, hey, it’s early in the year and we just want to make sure we have room to execute?

Devina A. Rankin: I definitely think the way that you summarized it there on the last part of your comment is the way that we’re thinking about this, in particular when we were setting our margin expectations for the year ahead, the momentum that we have in the fourth quarter shows that we have tremendous confidence in having the cost improvement work that we’ve been so focused on as an organization through automation technology, and importantly, the delivery of trucks as something that we can continue to see benefits from in the year ahead. The caution for us, I would say that may have us below that seasonally adjusted margin outlook that you’ve done. It really relates to a couple of things. It’s one, some of the weather impacts that we saw in January.

Two, last year when we gave inflation outlook, we tended to see that inflation was sticking around and being more stubborn than we had predicted and so we’re taking a more cautious view on inflationary pressures in the year ahead than we did a year ago. But really what I want to highlight is that, there’s tremendous confidence in the fundamentals. The price cost spread has improved. The accelerated truck deliveries and our optimization efforts and the discipline in SG&A are all showing strong results. I think the best line to look at is actually our repair and maintenance line and the operating expense as a percentage of revenue category. And, over the long-term that had trended below 9% of revenue for us and through the first nine months of 2023, we were at 9.9%.

That measure was down to 9.1% in Q4. So, we know that we’ve got some really strong momentum coming into the year ahead that will continue those cost benefits that you saw us produce in the fourth quarter. Into 2024, we just think that it’s prudent to be on the conservative side when predicting full-year margin.

James C. Fish: So, Jerry, real quickly, we did kind of anticipate that there will be some questions on margin. And so, just a couple of things here. First of all, the margin obviously for Q4 was as strong as we could have expected it and to be and that has continued as we look at the month of January. January came in quite strong for us, so we’re pleased with that. The second point would be around some of the questions that you’re asking around conservatism on margin for ‘24 and Devina did a really good job of explaining that. I think it’s really just I guess you could argue that it’s conservative based on 90 basis points of improvement from 2022 to 2023. But there seems to be an uncertain year in front of us every time we come to this point.

We don’t know exactly what the economy is going to do. Some days I feel great about the economy, other day is not so great. So, you could argue there’s a little bit of economic conservatism in there and also a little bit of forecasting conservatism coming off such a strong year that you want to try and say we’re going to do the same thing going forward into ‘24. But we do feel really good about the way we finished the year and honestly the way we’ve started the year so far through January.

Jerry Revich: Really appreciate the color. And Jim, can I ask you just on a separate topic, landfill gas transactions are coming in at really attractive levels? The Enbridge transaction was $2.70 per MMBtu. It’s costing you folks $50 per MMBtu to bring your assets online. So, just given how apparently deep the market is for those type of assets, can you just update us on how are you thinking about what it would take for you to consider monetizing some of the landfill gas assets when you bring them online? Has the attractive market price impacted how you’re thinking about the own versus sell opportunity?

James C. Fish: So, I’m going I’ll say one word on that and then I’m going to turn it over to Tara Hemmer to maybe give a little bit more color. But, that’s always an option for us. And we have multiple options and it’s good to be in a place where you have multiple options. But at this point, we’re pleased with the progress we’re making on building these plants. We have a number of plants that are at various stages of construction. Tara, anything to add to that?