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    Waste Management Inc (WM)

    Q4 2023 Earnings Summary

    Reported on Jan 10, 2025 (After Market Close)
    Pre-Earnings Price$199.49Last close (Feb 13, 2024)
    Post-Earnings Price$199.07Open (Feb 14, 2024)
    Price Change
    $-0.42(-0.21%)

    What went well

    • WM achieved significant margin expansion in Q4, with operating EBITDA margin up 220 basis points year-over-year, driven by efficiency improvements in the collection and disposal business and successful cost optimization strategies. They are nearing their aspirational metrics set earlier, such as 30% EBITDA margin, SG&A at 9%, and OpEx at 60%, demonstrating strong execution and potential for continued growth.
    • WM's sustainability initiatives are progressing well, with increased targets for their renewable natural gas (RNG) business. They have increased their RNG EBITDA target by $10 million, and are adding new recycling projects including two new projects in Canada, contributing to their growth. They are confident in project timelines and have strategies to mitigate commodity price volatility, such as moving to a 95% fee-for-service model in recycling and securing offtake agreements for renewable energy.
    • WM is uniquely positioned to fully monetize D3 RINs credits due to their ownership of RNG production and a large fleet of compressed natural gas vehicles. This allows them to allocate RNG to their own fleet, generate RINs, and capture full value without relying on third parties, providing a significant competitive advantage in the renewable energy space.

    What went wrong

    • Sustainability projects have experienced delays due to supply chain constraints, leading to a slowdown in 2022 and the first half of 2023.
    • Inflation and supply chain issues have increased sustainability capital expenditures by approximately $300 million, from the initial $2.2 billion to $2.8-$2.9 billion.
    • The company is adopting a cautious margin outlook for 2024 due to persistent inflationary pressures and economic uncertainty, which may impact profitability.

    Q&A Summary

    1. Margin Outlook
      Q: How will margins trend in 2024?
      A: Waste Management expects margin expansion to be more heavily weighted toward the front half of 2024, particularly in the collection and disposal business. They anticipate significant margin improvements in this area. SG&A margin expansion will be fairly even over 2024. The sustainability businesses' commodity price benefits are muted year-over-year, but renewable natural gas projects will contribute to margin expansion, especially in the back half of the year.

    2. Sustainability Investments
      Q: What's the status of sustainability CapEx and EBITDA targets?
      A: The company increased its sustainability CapEx guidance to $2.8–$2.9 billion, up from $2.2 billion, primarily due to inflation in renewable natural gas builds related to supply chain, construction costs, and interconnects. They plan to have roughly 40 projects under construction during 2024 and expect to exit the year with a run rate EBITDA approaching $300 million, building momentum toward the $800 million target by 2026.

    3. Pricing Strength
      Q: Can you discuss pricing strength in 2024?
      A: Waste Management anticipates maintaining strong pricing in 2024, with collection and disposal yield growth around 4.5% to 5%. Residential and disposal pricing showed year-over-year increases, supporting margin growth. Pricing continues to be a strength and is expected to add margin in 2024.

    4. Cost Optimization Efforts
      Q: Update on automation and productivity initiatives?
      A: The company is making great progress in reducing labor dependency, targeting the elimination of 5,000 to 7,000 jobs across areas like customer experience (about 75% complete), routing (40% complete), and recycling (20% complete). These efforts have positively impacted margins, notably in labor costs in Q4.

    5. Price-Cost Spread
      Q: Can you maintain the price-cost spread?
      A: Waste Management expects the price-cost spread to stay similar in 2024 as in 2023. They feel good about wage inflation control and anticipate that price-cost dynamics won't change significantly.

    6. Inflation and Cost Pressures
      Q: How are inflation and wages impacting costs?
      A: The company is cautious about inflationary pressures in 2024. Wage inflation is expected to be north of 4%, starting at 4% with additional spot increases in certain markets. They are taking a conservative view on cost outlook due to economic uncertainties.

    7. Acquisition Outlook
      Q: What are your acquisition expectations?
      A: Waste Management sees a robust acquisition pipeline, driven by factors like lack of succession plans at smaller firms and labor challenges they face. They plan to capitalize on these opportunities but will ensure returns are similar to their organic growth projects.

    8. Commodity Price Impact
      Q: How do commodity prices affect your business?
      A: Commodity price benefits in recycling are muted, and higher commodity prices can compress margins due to the high-return brokerage business. In recycling, 95% of contracts are fee-for-service, insulating the company from commodity price volatility.

    9. Renewable Natural Gas Pricing
      Q: What RINs pricing assumptions are in guidance?
      A: The company assumes a $3 RIN price in 2024. They have about two-thirds of their offtake locked in for 2024, a mix of long-term contracts and RINs sold forward at higher rates than $3. The remaining volumes are expected to be sold at the $3 RIN guidance.

    10. Free Cash Flow Conversion
      Q: What's the free cash flow conversion expectation from sustainability investments?
      A: Waste Management expects strong free cash flow conversion from sustainability investments due to lower maintenance capital, estimating a conversion in the 70% to 90% range.

    11. Fleet Renewal
      Q: Are you caught up on fleet renewals?
      A: The company delivered about 1,700 units in 2023, which is close to a full allotment, with another 300 units to be delivered. They expect to be fully caught up by the end of 2024.

    12. Hazardous Waste Business
      Q: Can you discuss your hazardous waste business outlook?
      A: Waste Management's hazardous waste business continues to be a valuable component with national coverage. They are looking for opportunities to grow this business, particularly in the Southeast and Gulf Coast, leveraging their transportation assets.

    13. Event-Driven Business
      Q: Does 2024 guidance assume event-driven business returns?
      A: The company is not necessarily expecting a rebound in special waste volumes in 2024 but anticipates some momentum from Q4 2023 to carry over. They noted that Hurricane Ian volumes benefited Q1 2023, which will impact Q1 2024 comparisons.

    14. Extended Producer Responsibility
      Q: What are the opportunities with EPR in Canada?
      A: Waste Management is investing in two projects in Ontario related to Extended Producer Responsibility, leveraging their automation investments. EPR in Canada operates on a fee-for-service model, and the company is monitoring EPR developments throughout Canada and pending legislation in the U.S..

    15. Sustainability EBITDA Target Delta
      Q: What's the reason for the change in sustainability EBITDA targets?
      A: The increase to $510 million in renewable natural gas EBITDA targets accounts for growth in the business without including eRINs and third-party RNG projects. This is an increase from the previous target of $500 million.

    16. Monetization of D3 RINs Credits
      Q: How do you monetize D3 RINs credits when using RNG in your fleet?
      A: Waste Management uniquely benefits by allocating renewable natural gas to their own fleet, allowing them to generate RINs without giving up any value. They receive the full RIN value and balance spot market sales with forward contracts.

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