Waste Management, Inc. (NYSE:WM) Q1 2024 Earnings Call Transcript April 25, 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: Hello and thank you for standing by. Welcome to WM First Quarter 2024 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] I would now like to hand the conference over to Ed Egl, Senior Director of Investor Relations. You may begin.
Ed Egl: Thank you, Tawanda. Good morning, everyone. And thank you for joining us for our first quarter 2024 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 will 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. Before we get started, please note that we follow 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 for the press release include important information.
During the call, you 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 in 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, 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. Additionally, projected future operating EBITDA and margin is anticipated to be adjusted to exclude such items that are not currently determinable but may be significant. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the 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 p.m. 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 April 25, 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.
Jim Fish: All right. Thanks, Ed, and thank you all for joining us. The WM team delivered another quarter of strong financial results to start 2024, powered by outstanding operational performance in the Collection and Disposal business. Total company operating EBITDA grew nearly 15% in the first quarter and margin expanded 240 basis points, driven by substantial momentum on cost optimization efforts and disciplined execution on our pricing programs. Last quarter, we said the areas of strength in 2024 would look very similar to those of 2023 and that was definitely the case in Q1. Continued traction on cost optimization led to our third consecutive quarter of operating EBITDA margin above 29.5%, with Q1 coming in at 29.6% in the historically lowest margin quarter of the year.
This margin result exceeded our expectations and reflects the tangible benefits of technology on our operating costs, the sustained effectiveness of our pricing strategy and the substantial progress we’re delivering on our sustainability initiatives. It’s our track record in these areas that gives us confidence we’re positioned to deliver our highest ever full year operating EBITDA margin between 29.7% and 30.2%, which is more than 100 basis points of expansion from 2023 at the midpoint. Our ability to convert more of each revenue dollar to earnings and free cash flow allows us to raise our prior outlook for both operating EBITDA and free cash flow by $100 million. As we progress through 2024, we’re maintaining our focus on three priorities, disciplined pricing across each line of business, leveraging technology to permanently reduce our cost to serve our customers and executing on our strategic investments in sustainability growth.
John and Devina will cover more details on where we’re seeing traction within the cost structure and where we have further runway, so I want to spend a few minutes on the other two priorities, our pricing strategy and the progress we’re making in expanding our sustainability businesses. Beginning with pricing, we’re pleased with the results we’ve seen from embracing a customer lifetime value model. Our teams are able to leverage customer-specific analysis to understand where a customer is on their journey and design actionable strategies that will extend customer attention, improve profitability or both. We’re confident that we’ve found a winning approach to data-driven decision-making that optimizes price to reflect the value of the services we deliver, the strength of the asset network and our leading commitment to environmental sustainability.
Our first quarter results, again, show that we have the ability to leverage price increases to cover costs and grow margin while also reducing customer churn. Shifting to our sustainability businesses, during the quarter, we delivered growth projects across the recycling and Renewable Energy businesses. This includes completing a large recycling upgrade in Germantown, Wisconsin. The updated facility relies on state-of-the-art equipment that reduces labor costs, increases throughput by 20%, up to 60 tons of material per hour and improves product quality. We have another nine upgraded facilities scheduled for completion this year and we’ll be opening three new recycling facilities and expanding our industry-leading single stream network even further.
Additionally, we’ve completed a new renewable natural gas facility this quarter at our DFW Landfill in the Dallas-Fort Worth market, and we remain on track to commission another four new renewable natural gas facilities in 2024. We’re also excited to announce that WM was just named the official sustainability partner of Major League Baseball. WM’s work with MLB is the first collaboration of its kind between an environmental services company and a professional sports league team — sports team league. With this partnership, we have the opportunity to offer services to all 30 MLB clubs in the United States and Canada. We expect to leverage our expertise to build comprehensive plans to improve the environmental impact of Major League Baseball and its clubs.
In closing, I want to thank our WM team for their — for all their hard work during the quarter. I’m immensely proud of their dedication and execution, which have helped achieve such strong financial results. And I’ll now turn the call over to John to discuss our operational results.
John Morris: Thanks, Jim, and good morning. In the first quarter, operating expenses and percentage of revenue improved 210 basis points year-over-year to 60.9%, continuing the positive trend of our discipline management of operating costs, particularly in our collection business. Through strategic investments and innovative solutions and process optimization, we delivered improvements in operational efficiency, extracting costs and setting a new standard for managing the middle of the P&L. Combining this strong operating expense performance with the discipline pricing performance Jim described, we greatly enhanced overall operating EBITDA margins. In the first quarter, operating EBITDA in our Collection and Disposal business grew $212 million and margin expanded 310 basis points to 36.6%.
As we continue our journey of automation and optimization, we remain committed to harnessing the power of technology to drive sustainable growth, further reduce costs and improve profitability. In the first quarter of 2024, our continued adoption of technology and automation initiatives led to substantial reductions in both labor costs and repair and maintenance expenses. On the labor front, efficiency in all three of our collection lines of business improved meaningfully from the first quarter of 2023 as our implementation continues to gain traction. As an example, we’re seeing nice improvements in performance from our routing efficiency program, Next Day Optimization or NDO, in our industrial line of business. This tool allows us to more dynamically route and it improves our efficiency, which is reducing our cost to serve and improving our asset planning.
Currently, we have deployed NDO at 92% of our collection sites and the majority of those are already achieving or exceeding efficiency targets. Additionally, we are achieving great results in the automation of our residential routes. Through Q1, we have automated over 650 routes and removed almost 800 rear load trucks since 2022. This has led to upwards of a 30% efficiency gain and residential EBITDA margins approaching 20%. The integration of these technology investments coupled with the benefits of improved driver retention have resulted in 135-basis-point improvement in labor costs as a percentage of revenue. In the first quarter of 2024, driver turnover improved to about 18% down from over 22% a year ago. We expect ongoing benefits from continued moderation inflation, as well as the investments we’re making in our people and processes as we progress through the year.
Turning to repair and maintenance, in the first quarter, repair and maintenance spending decreased year-over-year for the first time in several years and spending as a percentage of revenue improved 50 basis points. In addition to our strong process discipline, we are also leveraging technology to reduce these costs. These technologies have enabled us to digitize much of our workflow, beginning with all of our technicians who now have portable technology in their hands. These tools facilitate our ability to assign and track work, drive technician efficiency, reduce downtime and improve asset utilization. Our results are encouraging and we see further runway to optimize repair and maintenance costs in the future. In addition to great operating cost performance, we continue to deliver topline growth primarily through discipline execution on our pricing programs.
Our customer lifetime value model continues to drive strong organic revenue growth and our sales metrics in the quarter are a clear indication of our success in profitably growing the Collection and Disposal business. Churn was near the lowest rate that we’ve ever seen in 8.5%, new business improved 16% and continues to outpace lost business. Rollbacks remain in the low double digits, net service increases remain positive and our net promoter score improved by almost 12% year-over-year. Looking at our revenue growth, as Jim said, we’ve seen a strong start to the year in pricing. Volume has been relatively consistent with our original expectations with the exception of our temporary roll-off business. The softness in its volume category reflects some slowness in the homebuilding and industrial segments of the macro economy.
C&D was also impacted with the lapping of volumes related to Hurricane Ian cleanup last year. With that said, our two bellwethers for demand, commercial collection and MSW volumes were positive in the quarter and we also experienced a nice uptick in special waste tons in the quarter. For the full year, we now expect total revenue growth of between 5% and 5.75%. The revision from our prior expectation is driven by two things. The softer temporary roll-off volumes mentioned and a lower outlook for energy surcharge revenue given the decline in the average diesel cost relative to our expectations. Our pricing remains on track and in some lines of business ahead of our original expectations. Our teams delivered outstanding performance in the first quarter and I can’t thank them enough for all their contributions to our success.
I’ll now turn the call over to Devina to discuss our first quarter financial results in further detail.
Devina Rankin: Thanks, John, and good morning. Growing our adjusted operating EBITDA margin by 240 basis points in the first quarter stands out as the best indicator of WM’s strong start to the year. As John discussed, the lion’s share of this margin expansion came from the optimization of our operating performance in the collection business, with labor efficiency and improved repair and maintenance costs driving a 270 basis point improvement in our total company margin from the core. Our continued focus on managing our back office spending also contributed 20 basis points of margin expansion in the quarter, with SG&A as a percentage of revenue coming in at 9.5%. Commodity impacts in the quarter largely offset each other as fuel price impacts benefited margin by about 40 basis points and recycling results decreased margin by about 30 basis points, primarily from the impact of higher recycled commodity pricing in the brokerage business.
The remainder of the margin bridge from Q1 of 2023 to Q1 of 2024 relates to a headwind of about 60 basis points from the combined impacts of incentive compensation and costs incurred by our corporate team to drive adoption of our optimization program. Our strong margin and earnings combined with benefits from working capital and lower cash incentive compensation payments led to robust growth in first quarter cash from operations. We’re starting the year strong with cash flow from operations as a percentage of revenue up over 500 basis points to 26.5%, demonstrating the value of our margin expansion to growing the company’s cash flow yield. Capital expenditures totaled $668 million in the quarter with both capital spending to support the base business and our investments in sustainability growth tracking as planned.
Our first quarter free cash flow of $714 million allowed us to invest across all of our capital allocation priorities. We returned more than $550 million to shareholders paying more than $300 million in dividends and repurchasing $250 million of our stock. And all of this, we still maintained our leverage ratio at our target levels of about 2.6 times. With our strong balance sheet and robust earnings and cash flow outlook, we are well positioned to continue our commitment to shareholder returns and long-term growth. Our effective tax rate in the first quarter was 18.6%, which includes a $37 million benefit from investment tax credits related to the development of renewable natural gas projects. As we noted during our fourth quarter earnings call, our original expectation was that we would see $120 million benefit in 2024 from the ITC and we now expect $145 million for the full year.
We expect this to benefit both our tax expense and free cash flow in 2024. As Jim mentioned, our great start to the year has put us on a higher growth trajectory for the full year than we initially anticipated when we gave guidance last quarter. We’re confident that our full year operating EBITDA margin results can exceed the very strong 29.6% we achieved in the first quarter and that is reflected in our increased outlook for 2024 operating EBITDA and margin. As we think about the balance of the year, we anticipate that outsized earnings and margin growth continues in the second and third quarters from our pricing programs and momentum and operating efficiencies that began late in the third quarter of 2023. We continue to expect that growth in our sustainability businesses will be more weighted to the back half of the year as more recycling and renewable natural gas projects begin operations.
Pulling these points together, we want to emphasize that $85 million of the $100 million increase in our operating EBITDA guidance for the year is attributable to our team’s strong execution on driving efficiency and the improved cost to serve in the collection business. The remaining $15 million is related to higher recycled commodity price expectations for the year. To wrap up, we’re very pleased to deliver our first quarter results that exceeded our own high expectations. Our sustained strong results are a testament to the investments we have made in talent, technology and assets over the past several years. As always, I want to thank the entire WM team for their focus and dedication to delivering on our commitments to our customers, our communities and our shareholders.
With that, Tawanda, let’s open the line for questions.
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