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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