Earnings Call Transcript - WM Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Waste Management's Fourth Quarter and Full Year 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to hand the conference over to your host Mr. Ed Egl. Sir, the floor is yours.

Ed Egl, Host

Thank you, everyone, for joining us for our fourth quarter 2020 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, including our 2021 outlook. Before we get started, please note that we have filed a Form 8-K this morning 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, 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 our filings with the SEC, including our most recent Form 10-K and subsequent Form 10-Qs. John will discuss our results in the areas of yield and volume, which unless otherwise noted, 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 fourth quarter of 2019. Net income, EPS, operating EBITDA and margin and SG&A expenses have been adjusted to enhance comparability by excluding certain items that management believes do not reflect our fundamental business performance or results of operations, including costs incurred in connection with our fourth quarter acquisition of Advanced Disposal Services or ADS. 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 until 5:00 p.m. Eastern Time on March 4. To hear a replay of the call over the Internet, access Waste Management's website at www.wm.com. To hear a telephonic replay of the call, dial 855-859-2056 and enter reservation code 1965816. Time-sensitive information provided during today's call, which is occurring on February 18, 2020 may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, Jim Fish.

Jim Fish, CEO

Thanks, Ed, and thank you all for joining us. I hope everyone is staying safe and well. We're extremely pleased with our fourth quarter and our full year 2020 results. My fourth quarter was a continuation of our strong third quarter performance. Once again, despite the impacts from the pandemic, our team delivered strong and consistent operating EBITDA in the fourth quarter that exceeded the fourth quarter of 2019. If you set aside the $38 million of operating EBITDA contribution from ADS and the $60 million fuel tax credit benefit in the fourth quarter of 2019 versus 2020, our legacy WM operating EBITDA grew 4% versus Q4 of 2019. This was our seventh consecutive quarter to generate operating EBITDA of more than $1 billion, showcasing the strength and consistency of our business. In the fourth quarter, we maintained our focus on providing reliable high-quality service to our customers even as we welcomed a substantial number of new customers and team members following the acquisition of Advanced Disposal. As with the third quarter, our fourth quarter operating EBITDA margin was impressively strong at 28.1% even when you consider that it included 50 basis points of dilution from ADS. For the full year, 2020 matched our highest annual operating EBITDA margin of 28.4%. Excluding ADS, we set a new record with 2020 operating EBITDA margin of more than 28.5%. In a year where many companies have suffered significant financial impacts from the pandemic and resulting economic crisis, Waste Management's resilience delivered full year 2020 results within 1.5% of our record-high 2019 operating EBITDA. As we look to 2021, in addition to the strong continuous improvement measures we're taking in our collection and disposal business, WM is perfectly positioned to leverage our focus on ESG and our accelerated investments in technology to benefit all of our constituents, employees, customers, shareholders, communities, and the environment. WM made the decision in March to accelerate technology spending, and we're more confident than ever that these investments are the right approach to propel us forward in a post-COVID world. We've made considerable progress toward transforming our business model by seamlessly connecting the front-end customer experience to our back-end processes. Our online sales channel is growing at a triple-digit rate, and we're receiving positive feedback from our customers. In 2021, the value creation of our Customer Service Digitalization will step up as we further differentiate our service to our customers, automate manual processes, and drive further efficiencies and reliability in our operations. On the ESG front, WM has emerged as a true leader in sustainability. This year's WM Phoenix Open highlighted our ability to demonstrate our expertise and leverage our brand recognition for sustainability. Following the discussion at our Sustainability Forum, I received a note from Doug McMillon of Walmart saying, 'Thanks for your leadership, Jim.' His note was flattering, but it also reflected WM's strong position with large companies regarding sustainability and our potential to assist them in achieving their sustainability goals. Looking toward our financials for 2021, we expect organic revenue growth of 4% to 4.5%, as we anticipate volume growth to improve as the impact from the pandemic lessens. We also foresee overall operating EBITDA growth between 10% and 13.5% for 2021. In closing, we performed exceptionally well in 2020, despite COVID-19 challenges, and we're poised for another strong year in 2021. I'm eternally grateful to our teammates who made it happen this year in the face of difficult circumstances. I'll now turn the call over to John to discuss our operational results for the quarter.

John Morris, CFO

Thanks, Jim, and good morning, everyone. We're very pleased with our strong finish to 2020, both in the performance of the legacy Waste Management business and our progress in integrating the ADS operations. As Jim said, our quarterly and full-year results underscore the strength and resiliency of our business model. Improving volumes, healthy pricing, and better recycling performance produced organic revenue growth for the first time since the pandemic began. As expected, legacy Waste Management collection and disposal volumes improved sequentially in the fourth quarter from a decline of 5.5% in the third quarter to a decline of 2.7% in the fourth. Fourth-quarter MSW volume grew 1.2%, and C&D volume, excluding hurricane cleanup, grew 1.8%, both strong indicators of continued economic recovery. While the rate of volume recovery did moderate during the quarter, we did not see a backslide when COVID cases increased in the fall. We continue to make progress improving the residential line of business, with our residential yield improving 60 basis points to 3.7% in the fourth quarter. Operating costs were 61.5% of revenue in the fourth quarter, compared to 60.2% in Q4 2019. Despite some noise in the fourth quarter results, we remain focused on cost control and continue to benefit from a lower cost structure. Overall, we expect organic revenue growth from yield and volume in the collection and disposal business of between 4% and 4.5% and overall revenue growth between 10.75% and 11.25% during 2021. We hit the ground running on the ADS integration on October 30, and we expect to achieve between $50 million and $60 million in synergies during 2021. We are very optimistic about our recycling and renewable energy businesses and anticipate strong growth from these in the year ahead. Thank you, and I’ll now turn the call over to Devina to discuss our 2020 financial results and 2021 financial outlook in further detail.

Devina Rankin, CFO

Thanks, John, and good morning. Our 2020 results demonstrate strong execution from our frontline teams across North America serving our customers throughout the pandemic in an increasingly cost-effective way. Fourth-quarter capital spending was $394 million, that included $29 million to support the integration of ADS, and $30 million of capital that we intentionally pulled forward given the recovery in our operations during the third and fourth quarters. Waste Management generated free cash flow of $2.656 billion in 2020. Given the significant impact of the ADS transaction on this result, normalizing for divestitures provides a 2020 free cash flow of $2.082 billion, which demonstrates the resilient nature of our business. Moving to our 2021 outlook, we anticipate 10.75% to 11.25% revenue growth with solid organic growth in the collection and disposal business of between 4% and 4.5%. This underpins our 2021 operating EBITDA guidance of $4.75 million and $4.9 million. We also see potential incremental investment opportunities in our recycling and renewable energy businesses, with a focus on maximizing long-term value and total shareholder returns. We expect our dividend payments to be about $975 million in 2021, and we're committed to a capital allocation plan that prioritizes sustainable and high-return investments. Thank you to the Waste Management team for their dedication and adaptability throughout 2020. We are stronger than we were a year ago and looking forward to a better 2021. With that, let's open the line for questions.

Operator, Operator

Your first question will come from the line of Hamzah Mazari from Jefferies. Your line is now live. Go ahead please.

Hamzah Mazari, Analyst

Hey, good morning. Thank you. My first question is just on the volume side. What are you seeing on commercial service increases today, how that's trending? And then in the 4% to 4.5% organic growth do you -- are you baking in any vaccine impact on volume? And how should we think about that?

Jim Fish, CEO

Yes. Good morning, Hamzah. First as far as service increases go, we looked at the fourth quarter as being really good news because it's the first quarter in a while that we've seen net service increases. We were negative, of course, in Q2 and negative in Q3, and then we turned positive in Q4. Regarding overall volume, most macroeconomists are saying that the economy will recover as the vaccine rolls out. However, predicting the volume remains challenging due to the pace of the vaccine distribution. We do see encouraging signs from states that were lagging behind, like Illinois and Michigan, while states like California and New York still have challenges. We expect volumes to stabilize in the latter half of 2021.

Hamzah Mazari, Analyst

Got it. That's very helpful. And just any comments around the new EPA head? Any changes you see regulation-wise that could impact your business?

Jim Fish, CEO

First of all, it's still early in this administration. Those investments are not directly related to what we're seeing coming out of the EPA; they are driven by our desire to improvements. More regulation is often good for us, because we hold ourselves to a higher standard than the basic regulations. We believe that greater regulation can create opportunities and we're not displeased with what the future holds.

Hamzah Mazari, Analyst

Got it. Just a clarification question I'll turn it over. Are you guiding EPS, or is that sort of not part of guidance anymore?

Jim Fish, CEO

We didn't guide EPS. The main reason is that purchase price allocation impacts on depreciation can get convoluted. It's hard to predict, which is why we chose not to include it this year. Thank you.

Operator, Operator

Thank you. Your next question will come from the line of Kyle White from Deutsche Bank. Your line is now live. Go ahead please.

Kyle White, Analyst

Hey good morning. Thanks for taking the question. I wanted to talk about ADS and just kind of see how the integration is going.

John Morris, CFO

Kyle, no, I think I would tell you, 90-plus days in, I think we're right on track. There have been no real surprises; the things we've encountered have been anticipated. We are integrating well and I would say we are probably a little ahead. We did have the benefit of a longer timeframe to prepare for it.

Kyle White, Analyst

Got it. And I know it's still ongoing but do you have a sense of the impact that this extreme weather is causing for your volumes or maybe increased cost?

John Morris, CFO

Certainly in the Houston area, it has been a rough couple of days. Outside of Houston, we don't yet have a real sense of how significant it will be. The impact there seems more localized.

Jim Fish, CEO

I wish I had a sense of what damage has been done to my own home, because I have suffered a bit from it.

Devina Rankin, CFO

It would be great to know when power and water are coming back.

Tyler Brown, Analyst

Good morning. Thank you for all the guidance. It's very insightful. So as I look at the guidance, I think you’re looking for margin expansion in 2021.

Devina Rankin, CFO

There are indeed puts and takes on margins, but we still see good strong margin expansion as we progress with technology investments.

Sean Eastman, Analyst

I just wanted to dig in on the free cash flow bridge from 2020 to 2021. It seems like we should be building off of a $2.2 billion number in 2020. Can you clarify?

Devina Rankin, CFO

Yes. The bridge is conditioned on the increased EBITDA growth we expect in 2021 along with some cash tax adjustments. Overall, you are looking at a positive outlook for 2021.

Operator, Operator

Your next question will come from the line of Michael Feniger from Bank of America. Your line is now live. Go ahead please.

Michael Feniger, Analyst

Thanks for taking my question. I want to hear about PFAS and how it might impact your investment strategies.

Jim Fish, CEO

While many are viewing PFAS as a cost, we see it as an opportunity and we continue investing in strategies around it, while keeping an eye on regulatory discussions.

Stephanie Yee, Analyst

I just wanted to ask about your long-term growth algorithm; has it changed?

Devina Rankin, CFO

It's too early to tell if the growth rates have changed, but we expect some acceleration from technology investments in 2022.

Jim Fish, CEO

I appreciate everyone joining the call today. Thank you to our 50,000 teammates. We are grateful for your commitment and support. Stay safe.

Operator, Operator

Thank you everyone for participating. This concludes today's conference. You may now disconnect. Stay safe. Have a lovely day.