Waste Management, Inc. — 2024 Q1

So I'll start with the easy one and confirm there were no accrual reversals or onetime items in the first quarter. The only kind of one-timer that we could point out is actually the loss of the Ian volumes from the prior year that would have been a hill to climb from a margin perspective because, as you know, storm volumes come at high margins. So in fact, the $212 million operating EBITDA growth in the collection and disposal business came with 310 basis points of margin expansion to 36.6% in the collection and disposal business.

Yes, a little more color, Tyler. I think a few things are occurring. One is, as I mentioned in my prepared remarks, we're seeing a nice uptick in efficiency in all 3 lines of business from the mid-single digits up to the high single digits for residential. Residential is a really good story. If you look at the table in the back and you see we still traded about 2.9% of the volume down, but we made a good bit more money for the quarter. And I think we're starting to strike a better balance there.

Yes. You're testing my memory here, Tyler. But I would say around 10%, 11% is what I recall. And I've said when we started down this journey, if you will, to really rationalize some of the residential business, we wanted residential to compete with commercial and industrial. And while we're not quite there yet, we can see a point where that gets a little bit closer to converging. And I think as that happens, that 2.5% to 3% volume that we've been kind of trading off on average will start to moderate as we get closer to that line.

Yes, I think it's a great question. What I would tell you that we're looking at is a little softer climb from Q1 to Q2 in the normal sequential trends but still a marked improvement from Q1. And coming in, I would say, above 30% pretty handily in Q2 and Q3, in particular. We're currently expecting a little north of 30% in Q2 and potentially even north of 31% in Q3.

Tyler, I think part of that, I'm not sure it's that we're seeing any softening. It's just that we're kind of in uncharted territory here in terms of margin, I mean, which is a good thing, but to have a range that includes -- we've talked about numbers starting with a 3 for a long time, and now we finally have a number that starts with a 3 in our guidance range. So we're just being a little bit cautious about it. We certainly saw the trend that you just mentioned from Q1 to Q2 and on, but as did the field. But we feel like we're being maybe a little cautious as we get into some uncharted territory.

Yes, great question. I would tell you in terms of the $85 million, it really is predominantly oriented to 2 things. And one, the biggest driver is our cost efficiency performance and the really strong execution on reducing cost to serve that John's talked so much about on labor and repair and maintenance. The other is the strong execution on price, and that's moderately ahead of the expectations that we had when we came into the year, and we think that will hold for the rest of 2024.

I mean, I think the risk there, Devina, was as we discussed it, Bryan, the risk was, with such a strong performance, if we didn't raise guidance, there might have been questions on this call about, so is there something that we're not seeing that you're seeing? Is there something that you had that benefited you? And of course, Devina already answered that. The answer was no. But what we were a little concerned, if we didn't raise margin after such a huge margin performance that, by the way, was on the heels of 2 other quarters, that you might start asking questions about it, are we missing something? And you're not missing anything. We're just improving the margin that much.

Great, thank you. So our original expectations for 2024 were $120 million, so our current outlook of $145 million is a $25 million increase of the ITC benefit in 2024 specifically. With regard to our full outlook for ITC capture over the development plan that we have outlined, we are tracking toward the high end of the original range of $250 million to $300 million.

It's a great question. And while it's a little too early for us to be looking to specifically set guidance for '25, I do agree with you that there are some fundamentals that would make us a little more cautious to effectively repeating a 20 to 30 basis point margin expansion year-on-year. But that being said, I would tell you there are some fundamentals with respect to what we're seeing that we know have additional runway and growth, and those fundamentals really come on the labor and repair and maintenance side.

Jerry, I think there's some -- it's always going to be a combination of headwinds and tailwinds. Tara's here. She can talk about the fact that we have a bit of a tailwind next year when it comes to recycled shutdowns. I mean, this year, we're going to see somewhere in the neighborhood of $30 million, maybe a little less as an impact, a negative impact on us from shutting down these recycled plants while we rebuild them. That drops off pretty significantly next year. So you probably have somewhere in the neighborhood of a $25 million pickup or tailwind next year.

I can speak to that. So as we mentioned, we have 13 plants that we expect to bring online this year and another 13 next year, and those remain on track today. If you think about our exit in 2024 related to headcount, we'll be at a point where we've gotten 70% of the headcount out by the end of 2024 on the automation journey. So we should see not just a pickup from shutdown costs but also from the benefit of 30% improvement in labor costs and operating expenses from those plants.

So to use a baseball analogy since we just signed a deal with Major League Baseball, Tara, we'll be in the seventh inning?

Exactly, seventh inning stretch.

All right, perfect.

Well, I think the one line we can certainly look at, I think Devina had some of that in her prepared remarks, is kind of what the ratio is of direct labor to revenue. We saw a nice improvement there. I think that's a combination of 2 things: one, we've continued to be very disciplined about pricing. We've said we're playing the long game here, and I comment about customer lifetime value. So I think part of the benefit is we've continued to drive quality revenue at the top line across all the collection lines.

John, you mentioned also, and John mentioned that in his script that 90% of the roll-off line of business has been rolled out on this [ India ], which is the term for our optimization model. But we haven't rolled out commercial and haven't rolled out residential on that model yet, so we still have a fair amount of room to go there. And all of this is -- it was really 4, 5 years ago, an admission by us, that our routing was not as efficient as it could be if we used -- truly used technology to benefit that. I think that's probably the case across the entire industry. And so 4 or 5 years ago, we decided that, that had to change and now you're seeing the fruits of that.

I think we -- look, there's always room for improvement so I would not tell you that we're -- that we've perfected this. But from when I was a price guy back in the early 2000s, it's night and day. I think the team has done a spectacular job using data and analytics to their benefit and making sure that we are looking at the customer who really drives the decision as opposed to driving the decision just purely based on a number that we needed to hit in our price metrics. So I would tell you that we've made a ton of progress there. Are we perfect? We're not, but so much better than we used to be.

I would say, Jim, our customer metrics, I commented on, that's really the barometer. When you look at our gross and net PIs, when you look at customer churn, service increases and decrease and our net promoter score, I think those are all the measurements sort of right to the equal sign of how effective our program is.

Yes. I think the takeaway here is we were guiding to about 1% volume and now we're probably down to about 0.5%. So it's a move but it's not that meaningful of a move. It's early in the year, too. I would tell you that when we were preparing for today, we're obviously looking at Q1, Q4. And we've seen a little bit of an uptick here in April. It looks like it's getting a tad better.

This is Hilary Lee on for Toni. Congrats on the quarter, guys. Just want to touch on pricing a little bit. So when you said earlier that you expect price to hold for the rest of the year, does that mean you're expecting core price to be closer to around that 7% rather than the 6% you said last quarter?

Well, we did say for price that -- and I mentioned it earlier that we actually exceeded a little bit of our expectations. So we're not changing anything for the year, but your point is well taken, that's -- that we actually ended up a little bit higher than the full year guidance and so that's a positive for us. At this point, we'll leave it where we originally set it, though.

Got it. And as a follow-up, just wanted to touch on the sustainability. I know last quarter, you talked about having about $150 million of EBITDA coming from the sustainability investments for 2024. Just wondering if you would be able to kind of give us a little bit of information on potentially the cadence or kind of the split between R&D and recycling. Any details would help.

Sure. The $15 million increase that Devina referenced, the most significant portion of that is from recycling and really from commodity prices and not a whole lot of benefit from the renewable energy business. And the reason for that is we, today, have about 85% of our volume locked in, in either short, mid, or long-term offtake at this point, which is an increase from what we had said during our last call, which was roughly 2/3.

And in terms of the cadence of when that shows up, it will be more heavily weighted toward Q3 and Q4 because our time line with regard to the incremental projects that are coming online is weighted toward the back half of the year.

Congrats again on the quarter.

There's certainly nothing in the current year that tells us that this isn't the right baseline, so I do think that, that's a great way to look at it, Michael. Everything that you know about the WM culture is one that's focused on the customer and focused on continuous improvement. And I think those 2 things shone through and that commitment won't stop. So I do think the new baseline can go upward from here.

I think that you've characterized it well in terms of self-help. I think it's that continuous improvement mindset as well as some of the things that were out of our control like truck deliveries. For a while, we've really moved past that headwind and are starting to see strong traction from getting the assets that we need to run our business.

I look at it as continuous improvement, Michael. Self-help kind of sounds like I was an alcoholic and I'm coming off the bottle.

I know. Just giving you a little bit of a hard time.

The only thing I would say is that first half solid waste growth is even greater than what we had projected because what you saw is the strong margin performance and growth from the solid waste business really showed up more quickly than we were expecting. So that solid waste lift comes more heavily weighted toward the first half of the year.

Correct.

None of it, zero. All of it's in the tax line.

Yes, that's a good point, Michael. I mean, take that sort of a leading indicator of what we can expect from safety. But there's a clear distinction between somebody who's tenured in the seat and somebody who's not. And that's not a critique of folks who are new in the seat. It's just a matter of having that experience. And we do see a pretty wide spread between those who are tenured in operating a vehicle and those who are not. So as we continue to hold that number down, we expect the safety results to continue to improve as well.

By the way, Michael, the most -- we've said before, but the most important metric in this move from rear load to ASL is a safety metric. It's not a financial metric. Financials obviously are better, but it's a safety metric. And so as we continue to take a person from the back of the truck, which is the most dangerous place, honestly, in our entire operation, behind the truck, as we continue to move that person inside the cab, that will benefit us significantly.

No. Michael, I think you said it well. I mean, that's something we've been very focused on. Some of the technologies we've implemented over the last handful of quarters really starting to show benefits is really around capacity planning and making sure that we can see around the corner using, frankly, data and analytics that we didn't use a handful of years ago to be very predictive with a very small deviation between what history would tell us we need to plan from what we actually plan for, and we're still getting better at that.

We talked about the volume being down for the quarter, Michael, but I think the revenue, it was off about $7 million. So when you look at the amount of volume versus what we got from a revenue quality standpoint, from a margin standpoint, from that perspective, it was a good trade-off.

I did comment briefly on that. We've taken about 800 rear load trucks out of the fleet and about 650 rear load routes since we really started earnestly pursuing this in early Q2. We've got roughly another 350 to 400 routes we have targeted this year, and I say 350 to 400 because that has to do with some truck deliveries. And that probably -- when we get done in '24, that probably puts us in about the sixth inning, if you want to continue with the baseball analogy. We still got some room to go there. So hopefully, that clarifies that.

And in commercial?

Commercial. I think on the commercial side, where we have -- continue to see benefit is really driving efficiency, and Jim commented on it. We've got some more sophisticated, frankly, tools to help us route our vehicles and, in some cases, the dynamic element is where we think -- although it's less in commercial than roll-off, there is a dynamic element to commercial and our ability to real-time route that. And to route around real-time traffic is another capability that we are just putting in, in the system now.

Yes, it's a great question. And I would tell you in terms of the inflationary cost pressure on wages, we have seen that soften. We're currently at about 5% wage inflation for our driver population, and that's certainly down from low double digits at its peak. So that's the labor component that's associated with inflation.

This is Jack Wilson on for Tobey. Can you maybe speak to sort of the other benefits of the recycling facility upgrades other than sort of the potential to remove some positions? And is that capacity-based or is that some efficiency gains we'll be seeing?

Sure. There's really 2 other components. The first is we really improved the quality of material that's generated so we're able to sell some of the material at higher price points. So really moving mixed paper into higher grades, and we get a price premium. That's been demonstrated in all of the automated MRFs that we brought online.

Yes. So it really is an EBITDA story. And the EBITDA dollar growth that we are projecting of $100 million is expected to flow directly through. And the reason you don't have a tax offset there from the higher earnings is because we have $25 million of incremental expected ITCs. So those 2 kind of offset each other such that our outlook for cash taxes is effectively flat.

So Noah, I would tell you, we're obviously -- that's a topic we're following, I'm sure the whole industry is following very closely. There was some language in the last release from EPA that had some language about some protection for the landfill. But candidly, it didn't go far enough to give us a lot of security around the topic, so we're going to stay close to that. And as you can imagine, we're very vocal in all the right offices to make sure that we find a pragmatic approach to handling this because it is an issue that obviously has to be managed.

Yes. I think there certainly are always opportunities for us. Over the last couple of years, we've been focused on internal opportunities. We did say that with respect to M&A that we were sticking with our guidance that we've given in the last couple of years of $100 million to $200 million. But that there was some opportunity and the pipeline looked pretty strong. So I do think there's opportunity for us to grow both organically, as we've talked a lot on this call, but also inorganically, and we're just going to make sure it's the right acquisition that we feel like has a good strategic long-term prospect.

Okay. Well, thank you all for joining us today. We appreciate your participation, and we look forward to talking to you next quarter.