WASTE MANAGEMENT INC Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Performance: Operating EBITDA grew 11% in the quarter, with operating EBITDA margin reaching an all-time high of 30.5%. Margin expansion driven by collection and disposal business, disciplined pricing, employee retention, and technology use. Cash from operations through first nine months of 2024 was $3.88 billion, up over 16% from prior year.
• Strategic Initiatives: Completed nearly $800 million of solid waste acquisitions, progressing towards Stericycle acquisition with shareholder approval and international regulator clearances (except Canada). Focus on cost optimization, technology, and automation in collection and disposal. Sustainability investments in recycling and renewable energy with projects in progress.
• Operational Efficiency: Prioritized technology and automation to optimize cost structure. Operating expenses of 60.6% of revenue in Q3, improved 70 basis points. Labor costs improved through retention, technology, and automation. Weighted average collection efficiency rose, and repair and maintenance costs improved as a percentage of revenue.

Segment Performance

• Collection and Disposal: Operating EBITDA in the collection and disposal business grew $181 million in the third quarter, with margin expanding to 37.4%. Labor costs improved through retention, technology, and automation, with 800 routes automated in the residential fleet since 2022. Weighted average collection efficiency rose by 2%, with the residential line of business increasing more than 4%.
• Recycling: Completed 8 projects across the network, including 6 automation upgrades and new facilities in New York and Florida. 24 of 39 projects in the growth program completed, adding 1.5 million tons of annual recycling capacity. Automated recycling facilities have lower labor cost per ton and higher blended value on commodity sales.
• Renewable Energy: On track to commission 4 new renewable natural gas projects in the fourth quarter, with 7 of 20 planned projects online by year-end. 12 projects in active construction, and final plant to begin construction in early 2025. Seven projects expected to contribute ~6 million MMBtus of annual production in 2025.

Guidance

• Full Year 2024: Operating EBITDA toward the high end of expectations, with free cash flow on pace to achieve the high end of guidance of $2.15 billion. Total capital expenditures expected to be $3.15 billion to $3.25 billion, with increase related to sustainability growth investments.
• 2025 and Beyond: Anticipate continued growth in solid waste business, increased contributions from sustainability investments. Stericycle acquisition expected to create significant step change in revenue, earnings, and free cash flow. Sustainability-related EBITDA expected to be significant in 2025, with higher EBITDA growth as plants come online and lower CapEx. Synergies from Stericycle acquisition potentially higher than initial estimates.
• Renewable Energy: Four new renewable natural gas projects to be commissioned in Q4, with seven of 20 planned projects online by year-end. 2025 expected to be a pivotal year for contributions from renewable natural gas investments.

Risks

• Regulatory and Approval Delays: For renewable energy projects, there are multiple steps beyond construction, including commissioning, gas testing, and EPA approval, which can be delayed by government processes.
• Commodity Price Volatility: Recycling commodity prices can impact brokerage business and margin. Uncertainty regarding future commodity prices and their impact on EBITDA.
• Integration Challenges: With the acquisition of Stericycle, challenges in integrating systems, processes, and customer bases, which could affect margin and execution of synergies.

Question and Answer

• Q: Back in '23, you guys did call it $40 million of renewable segment EBITDA, but do you guys still feel comfortable that you'll be run rating somewhere around $300 million in sustainability EBITDA here in Q4? And can you guys give us any color, just big picture on how much incremental EBITDA comes from that segment in '25. A: Tara Hemmer said 2024 sustainability-related EBITDA expected in $120 million to $130 million range. 2025 expected to be significant for sustainability-related investments with higher EBITDA growth as plants come online, lower CapEx, but CapEx for program now expected ~$3 billion vs original $2.8 billion to $2.9 billion.
• Q: Wanted to ask about the revenue guidance raise. I know you don't give guidance quarterly, but 3Q was a little bit stronger than, I guess, what I was expecting. And so was the raise driven by 3Q performance? A: Devina Rankin said third quarter revenue growth came from landfill volumes and recycled commodity prices. Landfill volume contribution expected to continue into Q4, but recycling commodity price upside less optimistic for Q4 and 2025 due to port strike impacts and uncertainty.
• Q: If you could maybe provide any more color on the Canadian Competition Bureau review. It looks like it's the last one before you close on Stericycle. You've noted you feel comfortable you'll get that done in Q4 here. But just any color in terms of what they're looking at since they filed this? A: Devina Rankin said it's typical competition reviews in Canada, nothing concerning, and optimistic to get clearance in Q4 and close quickly.