REFINITIV STREETEVENTS
EDITED TRANSCRIPT
WM.N – Q4 2020 Waste Management Inc Earnings Call
EVENT DATE/TIME: FEBRUARY 18, 2021 / 3:00PM GMT
OVERVIEW:
WM reported 4Q20 results. Expects 2021 revenues to grow 10.75-11.25%.
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CORPORATE PARTICIPANTS
Devina A. Rankin Waste Management, Inc. – Executive VP & CFO Edward A. Egl Waste Management, Inc. – Director of IR
James C. Fish Waste Management, Inc. – President, CEO & Director John J. Morris Waste Management, Inc. – Executive VP & COO
CONFERENCE CALL PARTICIPANTS
David John Manthey Robert W. Baird & Co. Incorporated, Research Division – Senior Research Analyst Hamzah Mazari Jefferies LLC, Research Division – Equity Analyst
Jeffrey Daniel Goldstein Morgan Stanley, Research Division – Research Associate Jeffrey Marc Silber BMO Capital Markets Equity Research – MD & Senior Equity Analyst
Kevin Chiang CIBC Capital Markets, Research Division – Executive Director of Institutional Equity Research & Analyst Kyle White Deutsche Bank AG, Research Division – Research Associate
Michael Edward Hoffman Stifel, Nicolaus & Company, Incorporated, Research Division – MD & Group Head of Diversified Industrials Research Michael J. Feniger BofA Securities, Research Division – VP
Noah Duke Kaye Oppenheimer & Co. Inc., Research Division – Executive Director & Senior Analyst Patrick Tyler Brown Raymond James & Associates, Inc., Research Division – MD
Sean D. Eastman KeyBanc Capital Markets Inc., Research Division – Senior Equity Research Analyst Stephanie L. Yee JPMorgan Chase & Co, Research Division – Analyst
PRESENTATION
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Waste Management’s Fourth Quarter and Full Year 2020 Earnings Release Conference Call. (Operator Instructions)
I would now like to hand the conference over to your host, Mr. Ed Egl. Sir, the floor is yours.
Edward A. Egl – Waste Management, Inc. – Director of IR
Thank you, Lara. Good morning, everyone, and thank you 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 atwww.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.
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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 atwww.wm.comfor reconciliations to the most comparable GAAP measures and additional information about our use of non-GAAP measures and non-GAAP projections. Additionally, reconciliations for our prior 6 quarters of adjusted operating EBITDA are included in the table to the earnings press releases for those respective quarters and can also be found on our website atwww.wm.com.
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 atwww.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.
James C. Fish – Waste Management, Inc. – President, CEO & Director
Thanks, Ed, and thank you all for joining us, and I hope everyone is staying safe and well. We’re extremely pleased with our fourth quarter and our full year 2020 results. In many ways, our 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 ’19 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 kept our eye on the ball working together to provide 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% 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%. And excluding ADS, we set a new record with 2020 operating EBITDA margin of more than 28.5%.
So in a year where many companies have suffered significant financial impacts from the pandemic and resulting economic crisis, at Waste Management, the resilience of our people and our business model 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 in a perfect position 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 our investments in customer service digitalization, or CSD, are the right approach to propel us forward in the post-COVID world. We’ve made considerable progress towards transforming our business model by seamlessly connecting the front-end customer experience to our back-end processes.
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Our online sales channel is growing at a triple-digit rate. Most importantly, we’re receiving positive feedback from our customers. In 2021, the value creation of CSD will step up as we further differentiate our service to our customers, automated — 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, and we’re doing so in a manner that will benefit both shareholders and the environment. Possibly like no other year, this year’s WM Phoenix Open pointed to our ability to demonstrate our expertise and leverage our brand recognition for sustainability. This was highlighted during our Sustainability Forum panel discussion with 2 other ESG-focused CEOs, Satya Nadella of Microsoft and Doug McMillon of Walmart. Following our discussion, I received a note from Doug saying, “Thanks for your leadership, Jim.” His note was flattering personally to me, but it was also an important statement about where WM stands reputationally with large companies like Walmart with regard to sustainability and where we can help them and our other customers to achieve their sustainability goals. As corporations build road maps to address their own climate impacts, WM is well positioned to assist through an array of service offerings, including recycling and other beneficial uses such as composting and renewable energy generation.
Looking at the potential impact on our financials. So far in 2021, commodities are on a strong upward trajectory, and many experts believe this to be the start of a long-term trend. And as North America’s largest recycler and one of the largest producers of renewable natural gas for landfill gas, WM should benefit disproportionately from that long-term trend. We’re able to close the loop by using that renewable gas to power our natural gas fleet, redefine the processing business with our next-gen recycling technology enhancements and our fee-based pricing strategy, make new investments in innovative solutions for low-value commodities and expand our portfolio of renewable natural gas plants, all of which position us perfectly to benefit our shareholders over the next 3 to 5 years.
In addition to the E in ESG, we’re taking the S, our social responsibility, very seriously, too. Whether it’s our long-established focus on inclusion and diversity, our commitment to our employees to enhance benefits and guaranteed hours during COVID or our efforts to help the underserved and unemployed through our work with organizations like UpSpire and Concordance Academy, we believe in these causes, and we’re very confident in the long-term value add for our shareholders.
It’s rewarding to see that our focus on ESG as a strategic value creator for our shareholders as well as being the right thing to do is getting recognition. At the beginning of February, we were named to Fortune magazine’s World’s Most Admired Companies List for the third year in a row, claiming the top spot in our industry category. During the fourth quarter, we were named to CDP’s prestigious A List for tackling climate change. The global environmental nonprofit recognized Waste Management for the fifth consecutive year for our actions to cut emissions, mitigate climate risks and help develop the low-carbon economy. We were also named to the Dow Jones Sustainability Indices for North America and the World. For the third year in a row, we are in the title of Sector Leader for Commercial Services & Supplies. Our view is that our strategic approach to ESG will complement our investments in technology and our core business process improvements as the key ingredients of our future success.
Last year, we laid the foundation for lowering our operating cost model and for offering greater choice to how our customers interact with us, and we completed the sizable acquisition of ADS. All of this positions us well for growth in 2021. In the year ahead, we expect to deliver organic revenue growth of 4% to 4.5% as we continue to execute on our disciplined pricing programs and expect volume growth to improve in 2021 as the impact from the pandemic lessens.
From an operating cost perspective, we’ve learned how to operate our business with a lower cost structure, and we remain — we expect to retain that lower cost structure in 2021 and beyond. As a result, we anticipate overall operating EBITDA growth between 10% and 13.5% in 2021. We expect this substantial growth as we realize the value of synergies from continuing to integrate ADS and improve the profitability of its business, all while we increase our investment in CSD. The benefits from these technology investments and the full integration of ADS will provide runway for further margin expansion in the future.
In closing, we performed exceptionally well in 2020 despite the difficulties presented with COVID-19, and we’re poised for another strong year in 2021. For that, I’m eternally grateful to our teammates who have 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.
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