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

Tara J. Hemmer: I would just say this aligns really well with our business and we’re making great progress on building out these plans. The five that we’re going to bring online in 2024, we’re going to have strong contribution from them exiting 2024 and this is going to be something we’re going to continue to grow.

Jerry Revich: Appreciate the discussion. Thank you.

Operator: Thank you. One moment for questions. Our next question comes from Tyler Brown with Raymond James. You may proceed.

Tyler Brown: Hey, good morning.

Devina A. Rankin: Good morning.

Tyler Brown: Hey, Tara, actually, I want to come back to the updated sustainability CapEx figures of $2.8 billion to $2.9 billion. So, I may have missed it, but if I’m not mistaken that number was closer to $2.2 billion back at the Analyst Day. Now, I get that there are $350 million in incremental recycling opportunities, but what makes up the difference, call it that $300 million. Was that just inflation?

Tara J. Hemmer: Yes, the difference really is related to inflation, primarily in our renewable natural gas build and relates to inflation related supply chain, also a little bit on construction increases and interconnects. So, that is the difference.

Tyler Brown: Okay, perfect. That’s helpful. That’s very helpful. And then, Devina, thank you so much for the WM renewables segment reporting. But, I do just want to make sure that I understand it all. So, I get the impact in revenues from the change in the price of the commodities that are impacting that WM renewables and recycling line, but if you look at the change in that line versus the change in the net revenue for those, they don’t exactly line up. So, it tells me that there’s likely some volume component in there. So just to be clear, maybe this would be helpful, but when you bring on a facility like Eco Vista, where does that show up? Does that show up as basically volume in your IRG calc, or can you just help us with how the accounting will work?

Devina A. Rankin: Sure. And Ed and Heather will be happy to walk you through any details I don’t cover here. But, I’m glad, one, that the additional clarity is beneficial. The other that I would say is that on the IRG measures that we do, the internal revenue growth measures that we do, you’ll see commodity price impact in a single line, which is recycling processes and renewable energy, so that’s all price. And then you’ll see the incremental volume from new projects, whether it be automation projects that have more throughput at the plant or the new Eco Vista plant that will be in the volume line. In terms of the segment reporting line, the only thing that might be a little bit of a complicating factor is the internal revenue between the renewables business and the collection and disposal business, you can think of it as the renewables business paying a royalty to the collection and disposal business associated with the landfill gas production that doesn’t show up in the revenue line, because it’s effectively just a cost for the renewables business.

Hopefully that’s helpful.

Tyler Brown: Okay. Yes, I definitely think so. We’ll parse it out. But I think you mentioned the collection and disposal volume could be up maybe 1%. But again kind of going back to that total IRG table, could we actually see that number closer to 2%? Because I would assume that with $115 million of incremental renewables EBITDA, there’s probably at least a couple of $100 million of revenue associated with that, does that make sense?

Devina A. Rankin: So, the way to think about this is that when we gave that volume outlook that was just the collection and disposal volume. The renewable energy business increases. We have on a combined basis being in the range of 30 basis points to 60 basis points in the year ahead. And, that’s a combination of commodity price impacts and volume.

Tyler Brown: Excellent. Okay. Last one here, Devina. So, margins were super strong. We’ve talked about that. I think they’re up 230 basis points year-over-year in Q4. But can you kind of help us bridge that 230? I think there was a fewer day, maybe fuel was a help, maybe commodities help, just any color there would be appreciated. Thanks.

Devina A. Rankin: Yes, for Q4 specifically, again, the collection and disposal business and the efficiency that we drove was the lion’s share of that improvement at 220 basis points. Fuel was another 50 basis points. So, that really does explain almost the entirety of it. There are a few other puts and takes, but I would say that my comments earlier about repair and maintenance and then John’s comments about the labor line, those are the two places that are driving that 220 basis points of margin expansion.

James C. Fish: I think Tyler, a little bit of an add on here is that I’ve been told we don’t pat ourselves on the back enough, so I’m going to pat ourselves on the back a little bit here. When we started talking about some aspirational metrics, meaning margin, EBITDA margin, SG&A as percent of revenue, OpEx as percent a couple of years ago and then talking about technology and using attrition to reduce our labor dependence. Those numbers were pretty far out on the horizon. And, now in every case those numbers are literally a stone’s throw away for us. Whether you talk about 30% EBITDA margin, we’re right there for the fourth quarter, SG&A at 9%, we’re very close to that and OpEx at 60%, very close to that. So, I’m really proud of the team for executing so well on this and being able to stand up on this call today and last quarter as well and say those things that we put out there, those goals that we set, we’re getting close to achieving those.

That means we’re satisfied. We’ll continue to set higher goals, but I’m pleased with the fact that we’ve been able to get to those goals that were pretty far in the out on the horizon we initially set them.

Tyler Brown: Yes. No, love it. Appreciate it so much. Thank you for the time.

James C. Fish: You bet.

Operator: Thank you. One moment for questions. Our next question comes from Michael Hoffman with Stifel. You may proceed.

Michael Hoffman: Hey, gang. Thanks for the questions. Back to the margin question, John, it seems like looking at this on a two-year stack helps because you can’t perfectly time when you get some of your self-help. And that sort of accounts for really strong ‘23, a little more muted ‘24, but the two-year stack is sort of 60 basis points a year. So, where the question underlying that is, recycling is an incremental tailwind because you’ve got a pretty low estimate there relative to how you finished the year on the basket. GDP, I’m assuming you think it’s maybe 1%, 1.5% and the trend is stronger than that. So, that’s a tailwind. And then I think your wage growth is probably running closer to 3.5%, 4%, therefore, there’s clear spread on price cost. Am I looking at that correctly?

John J. Morris: I’ll start, Devina. I think on the cost spread comment to you, Michael, I think that’s what we’ve been talking about for the last couple of quarters whether you look at core price or our yield numbers. We’ve been talking about being disciplined in the way we approach pricing and over time in the last couple of quarters, we’ve been a great example that we’ve been able to really drive out, drive some operating efficiencies and drive out some of the labor dependency and Devina commented on the maintenance repair. That’s another bucket where we’ve made a lot of progress. I think in Q4 we were flat to slightly down year-over-year in terms of whole dollars. So, that’s part of what was helping us in Q4.

Devina A. Rankin: And then I’ll just add a little bit of color that provide some clarity on a couple of the points that you brought up, Michael. One, with higher recycling commodity prices, the brokerage business can actually put downward pressure on margin. And so that’s one of the things that we have built into our outlook for 2024. And then, in terms of wage inflation, we start at 4% with our folks. And so, wage inflation is still expected to be north of 4% when you take into account spot increases that we have to provide in certain markets to be responsive to various changes. So, 4% is kind of our baseline, and then you add on top of that.

Michael Hoffman: And your GDP assumption is pretty muted?

Devina A. Rankin: Yes. Basically, what we’ve always said is that we believe that our volume is about a 75% flow through from GDP. And so, we did have a fairly muted outlook with regard to GDP when we built our plan. I hope your crystal ball is better than mine, but I would tell you that our expectations for economic outlook continue to be that we need to be on the cautious side of things just because there’s so much left in uncertainty, you saw that with today’s print on CPI as an example, which exceeded expectations.

Michael Hoffman: Yes, I get that. It’s just the consumer seems to keep plowing ahead. Switching gears a little bit, Tara, if your renewable natural gas or landfill gas is kind of a Swiss army knife of renewable fuel, when do the federal agencies wake up to this and say we get a proper interpretation of the ITC or the 45Q or Z credits or come back to e-RINs. What’s your view of where that goes? And then the second piece is, what are you assuming happens out in the out years in that $1.5 billion of RNG spend, how much do you get back for credits?

Tara J. Hemmer: So, starting with the real positive, the one thing that the federal government did is, said a three-year RVO and having that for 2023 through 2025, you’ve seen clear stability in the program and so that’s been a positive. With the ITC, we think when Treasury issued their guidance that there was a misinterpretation over what was in the Inflation Reduction Act and we don’t just share this view, others do with us that are in the biogas community and generate landfill gas renewable energy from landfill gas. We’ve commented on that and we’re anticipating that Treasury will come out with some further guidance later this year and so cautiously optimistic there. So, there’s a whole host of credits that could be stacked. Obviously, the ITC was within our plan and we remain optimistic related to that and of course looking to 2025 with the production tax credit too.

Devina A. Rankin: On the ITC point, Michael, just so that we’re crystal clear in terms of the implications of that on our 2024 guidance. We contemplated $120 million of ITC benefit in our free cash flow outlook for the year.

Michael Hoffman: Okay. And then some housekeeping if we could. I love the segment reporting as well. Are we going to get any kind of tons-in, tons-out so we can actually do a bottoms up forecast on sales for the renewable and processing segment, and then how about megawatts and MMBtus to be able to do the same thing on a sales growth for renewables?

Devina A. Rankin: So, we want to take a breath and celebrate, all of the incremental transparency we’ve provided. We’re really proud of the work that the team did because, while it looks easy, it isn’t. There’s a whole lot of work that went into it. With regard to the more, I would say, operational driver elements of the reporting, we’ll continue to evaluate whether or not there’s anything that it’s a strong complement to the financial measures and consider any additions in the years ahead. But right now, we’re going to continue to execute on this strong reporting that we’ve been able to accomplish. And, we actually would like to see the industry follow suit in terms of providing additional visibility because we think it’s beneficial.