WASTE-MANAGEMENT Earningcall Transcript Of Q2 of 2024
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 have filed a Form 8-K that includes the earnings press release and is available on our website at www.wm.com. In addition, we have published a supplemental presentation with additional information elaborating on the strategic rationale for the company's planned acquisition of Stericycle. Page 1 The slide presentation is available on our website at investors.wm.com and as an exhibit to the Form 8-K. The Form 8-K, the press release, and the schedules in 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 and Form 10-Qs. 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. Net income, EPS, income from operations and margin, operating EBITDA and margin, and SG&A expense and margin 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 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 1:00 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 July 25th, 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. Page 2 Now I'll turn the call over to WM's president and CEO, Jim Fish. James C. Fish -- President and Chief Executive Officer OK. Thanks, Ed, and thanks for joining us. Our results for the quarter were fueled by strong operating performance in the collection and disposal business. We once again achieved double-digit operating EBITDA growth in the second quarter, keeping us on pace to achieve the full-year outlook that we provided last quarter. Quarterly operating EBITDA margin reached 30% for the first time in the company's history, driven by operating efficiencies from technology investments and the sustained effectiveness of our pricing strategy. We're pleased with our performance in the first half of 2024 and are well-positioned to deliver another year of strong financial results. Our team is executing very well on our strategic priorities, as evidenced by the expected growth in operating EBITDA approaching 10% for the full year. A big part of our strategic approach to growth is to find future opportunities where we can leverage our own expertise, whether it's using technology to improve our routing efficiencies, turning landfill gas into renewable natural gas, or automating recycling plants to drive greater throughput and lower operating costs. Each of these recognizes a future need and capitalizes on it. And now our recently announced agreement to acquire Stericycle presents another opportunity to leverage our expertise to drive higher growth. Stericycle has a leading position in the growing medical waste industry. The planned acquisition adds complementary business platforms to further our leading suite of comprehensive waste and environmental solutions, and these strategic benefits are accompanied by attractive financial benefits. Page 3 Our team is progressing through the regulatory approval process and integration planning, and we're excited to welcome Stericycle's team members to WM. Even as we add medical waste as a new vertical within our business to complement our existing collection and disposal business, we continue to position our solid waste network for future growth. As we've said, the pipeline for solid waste tuck-in acquisition opportunities was strong coming into 2024. Our teams worked hard to move tuck-in acquisitions to completion, and we've now closed more than $750 million of solid waste acquisitions through July. These transactions strengthen our core collection and disposal operations in North America in new geographies like Long Island, New York, and complement existing operations through tuck-in acquisitions in growth markets, in Florida, North Carolina, and Arizona. We also continue to execute well on sustainability, our sustainability growth investments. We expect to bring five new renewable natural gas projects online in 2024, adding to the two new facilities completed in 2022 and 2023. We have another nine projects in active construction, with construction beginning -- or expected to begin on the remaining four facilities later this year. Momentum is building and we're excited about the progress we're making. Investing directly in building our renewable natural gas platform meets all of our investment criteria. We're driving strong returns with expected payback periods of three or four years at better multiples than traditional M&A, plus we're expanding environmental benefits by collecting and beneficially using more landfill gas. And we're strengthening our core business by positioning our landfill assets as community energy partners. Looking forward, we're exploring the scale of opportunity in future project development and growth from our renewable energy business across our landfill network. At the same time, we continue to Page 4 maximize the value of the renewable energy we produce through a balanced marketing strategy that leverages the transportation and voluntary markets to secure returns, reduce risk, and manage volatility. These efforts demonstrate our commitment to scaling this unique growth opportunity to create long-term value for the environment and shareholders alike. Turning to recycling, our investments in automating our existing facilities and building capacity in new markets is helping differentiate WM with customers, unlocking new opportunities to further expand our network such as recent successes in Ontario. At the same time, our automation investments are providing consistent financial results, improving labor cost per ton by 30% to 35% and increasing the blended value on commodity sales by 15% to 20%. We completed our Pittsburgh and Atlanta automation projects during the second quarter and both facilities ramped up quickly. We're on track to complete another seven automation projects and add new facilities in New York, Florida, and Portland by year-end. Our progress to date increases our capacity from our recycling investments by more than 1 million tons. The WM story is one of delivering on our commitments. We achieved strong results in the first half of 2024 and are positioned to continue that trajectory during the balance of the year. As we kick off our planning process for next year, we have some early enthusiasm about 2025. Based on all the opportunities we discussed today, we're particularly bullish on the long term. It's our dedicated team that makes all of this possible, and I want to thank them for all of their contributions, and I'll now turn the call over to John to discuss our operational results. John J. Morris -- Executive Vice President, Chief Operating Officer Thanks, Jim, and good morning. We're pleased with our second-quarter results, particularly our Page 5 ongoing optimization of operating costs. Our teams remain intently focused on delivering safe and reliable service to our customers, and I want to thank them for their dedication, especially those in areas impacted by Hurricane Beryl in early July. Second-quarter operating expenses as a percentage of revenue improved by 130 basis points year over year to 16.9%. This improvement is a testament to our disciplined management of operating costs in our collection lines of business. Combining our strong operating expense performance with disciplined pricing, we significantly enhanced overall operating EBITDA margins. In the second quarter, operating EBITDA in our collection and disposal business grew by $203 million with margin expanding to 37.3%. Our continued adoption of technology and automation was a key driver of these significant operating cost improvements. Specifically, in labor, the use of scheduling and planning tools, advanced mapping technology, expansion of our dynamic routing capabilities, and automation of our residential fleet resulted in improved efficiency across all three of our collection lines of business for the second consecutive quarter. In residential, efficiency improved by nearly 6% in Q2, largely due to fleet automation. Our automated routes achieved over 30% efficiency improvement, contributing to a significant increase in residential operating EBITDA margin when compared to last year. Additionally, our people-first focus led to reduced driver turnover, which improved 300 basis points from a year ago. Companywide, the integration of technology and improved driver retention contributed to a 90 basis point reduction in labor costs as a percentage of revenue. We remain confident in the value of our technology and optimization efforts, and we expect to continue driving labor cost improvements throughout the year. Turning to other operating costs. Repair and maintenance spending as a percentage of revenue improved by 20 basis points, reflecting our continued adoption of technology-enabled processes and an improving truck delivery schedule. Page 6 Lower fuel costs also contributed a 20 basis point improvement to operating expenses as a percentage of revenue. We remain committed to optimizing our cost structure to meet both operational and financial objectives, and we're proud of the results we have achieved so far. And finally, turning to revenue growth. Our customer lifetime value model continued to drive organic revenue growth from price in line with our full-year expectations. Our pricing results relative to plan remain on track, reflecting our team's focus on using customer-specific data and insights to deliver price increases that keep pace with inflation and margin expansion objectives. Churn remains at 9% and service increases continue to outpace decreases, further reinforcing our execution. On the volume front, trends in commercial collection, MSW, and special waste remained strong in the quarter and are generally in line with expectations as our C&D landfill volumes when adjusted for the lapping of volumes related to the Hurricane Ian cleanup last year. However, volume in our roll-off line of business is one area where we continue to see a bit of softness. Similar to last quarter, we continue to see moderation in both a temporary business driven by homebuilding as well as a portion of our permanent roll-off business in the industrial segment. While a few segments of our collection volume are trending a bit behind our full-year expectations, our disciplined revenue management, combined with our strong execution on cost optimization continue to give us ample confidence that we are positioned to deliver strong financial performance throughout the rest of the year. In closing, I want to thank the entire WM team again for their contributions. Their performance so far in 2024 sets us up for continued success. I'll now turn the call over to Devina to discuss our second-quarter financial results in further detail. Page 7 Devina A. Rankin -- Executive Vice President, Chief Financial Officer Thanks, John, and good morning. We're pleased with the strong start to 2024, particularly when we focus on the three most important financial measures we track: operating EBITDA, operating EBITDA margin, and free cash flow. Starting with operating EBITDA. Through the first six months, we have seen this metric grow more than 12% with all of this growth being organic. This puts us on track to deliver our full-year outlook of nearly 10% operating EBITDA growth, well above our long-range annual target of 5% to 7%. As a reminder, in setting our operating EBITDA target for 2024 and then quickly increasing it by $100 million in April, we projected that achieving this year's outsized growth would be driven by two things. The first is the benefits of price and cost optimization in the collection and disposal business, which we expected to be weighted toward the first half of the year. And the second is incremental earnings contributions from our investments in growing our recycling and renewable energy businesses, which would be weighted toward the back half of the year. This is exactly how 2024 is tracking, giving us confidence in meeting or exceeding the midpoint of our guidance range for operating EBITDA with our current projection being $6.475 billion. This includes about $20 million to $30 million of incremental growth from tuck-in solid waste acquisitions in 2024. Turning now to operating EBITDA margin. It's worth highlighting again that at 30%, Q2 was the best quarterly operating EBITDA margin results in our company's history. In the second quarter, total company operating EBITDA margin expanded 130 basis points, and this was driven by about 200 basis points of margin expansion from price and cost optimization efforts in the collection and disposal business, and then a benefit from the sale of nonstrategic assets of about 50 basis points. These strong margin results were partially offset by higher risk management Page 8 costs, an increase in incentive compensation costs, and a modest drag from the net impact of recycled commodity prices and fuel. The key takeaway from looking at these puts and takes is that we saw a 200 basis point lift in our core business versus last year. And we see the benefits of employee retention, truck deliveries, and the use of technology and process to optimize the business that started in the second half of 2023 holding. The significant margin expansion and operating EBITDA growth in 2024 is delivering robust operating and free cash flow growth. Through the first six months of 2024, we've generated cash flow from operations of $2.52 billion, and that's an increase of nearly $450 million or 22% compared to the same period in 2023. Our double-digit operating EBITDA growth, favorable working capital trends, and lower cash incentive compensation payments are driving this strong performance. For the first half of the year, capital expenditures to support the business totaled $947 million. Sustainability growth investments were about $388 million. Both are tracking at plan that we anticipate spending at or slightly above the high end of our prior guidance of between $850 million and $900 million for sustainability growth investments in 2024. Pulling this all together, we've generated $1.24 billion of free cash flow in the first 6 months of the year, and we're confident that we will achieve our guidance range of between $2 billion and $2.15 billion of free cash flow in 2024. As Jim mentioned, we've closed more than $750 million in tuck-in acquisitions through July, and we look forward to closing the acquisition of Stericycle as early as the fourth quarter of this year. Given our elevated M&A activity, we want to reiterate our capital allocation priorities and emphasize our commitment to a strong balance sheet. WM has a disciplined approach to allocating capital to strategic growth opportunities, including the capital needed to sustain and grow our core solid waste businesses and investments that we're making to grow our recycling and renewable energy assets. We prioritize return on invested capital in making these decisions, and we expect all of our Page 9 investments to provide healthy returns above our cost of capital. We also remain committed to growing shareholder returns, which includes increasing the dividend as free cash flow grows. We intend to finance the Stericycle transaction using a combination of bank debt and senior notes. When combining the impact of the $750 million of solid waste tuck-in acquisitions with the funding of Stericycle, we now expect our leverage to be about 3.6 times post close. In light of this elevated leverage, we're temporarily suspending our share repurchase program so that we can work our way back to our targeted leverage range of 2.75 to 3 times about 24 months after the close of Stericycle. The slight revisions in our projected leverage figures since our announcement of the planned acquisition of Stericycle are updates that reflect the impact of layering on the additional tuck-in acquisition activity this year. We're steadfast in our commitment to debt investors and rating agencies because we know the value of our strong investment-grade credit profile. To wrap up, we're very pleased with our strong results, and I know the WM team remains hard at work to deliver on all of our goals for 2024. With that, Livia, let's open the line for questions. Questions & Answers: |
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