Q3 2020 Waste Management Inc Earnings Call

For standing by and welcome to the waste management third quarter 2020, <unk> earnings release Conference call.

At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.

You ask a question during the session you will need to press star one on your telephone please.

Please be advised that todays conference is being recorded.

If you require any further assistance please press star zero.

I would now like to hand, the conference over to your speaker today at Egl director of Investor Relations. Thank you. Please go ahead Sir.

Thank you Lindsey good morning, everyone and thank you for joining us for our third 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 Demeanor, Reagan Executive Vice President and Chief Financial Officer, you will hear prepared comments from each of them today.

Well a couple of high level financial to provide a strategic update John will cover an operating overview and Vito will cover the details of the financials.

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 Dot W.M. Dot com.

Form 8-K, the press release and the schedules to 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 uncertainties are discussed in today's press release and <unk> filings with the FCC.

<unk> form 10-K, and subsequent form 10 Qs.

John will discuss our results in the areas of yield and volume, which unless otherwise stated are more specifically references to internal revenue growth or I or g. from yield or volume.

During the call Jim John It to be that will discuss operating EBITDA, which is income from operations before depreciation and amortization.

Any comparisons unless otherwise stated will be with the third quarter of 2019 net.

Net income at Es operating EBITDA margin at FTD 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, including cost incurred in connection with the recently closed acquisition of 80 S.

These adjusted measures. In addition, free cash flow are non-GAAP measures. Please.

Please refer to the earnings press release, and tables, which can be found on the company's website at www Dot W.M. dotcom 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 one PM eastern time today until five P.M. Eastern time on November 16.

To hear a replay of the call over the Internet access the waste management website at Www Dot W.M. dotcom.

If you hear a telephonic replay of the call dial 8558592, 056, and enter reservation code 91778 to four.

Time sensitive information provided during today's call, which is occurring on November 2nd 2020.

That would be accurate at the time of a replay any.

Any redistribution retransmission or rebroadcast of this call in any form without the expressed written consent of waste management is prohibited.

Now I will turn the call over to waste Mad <unk>, President and CEO Jim fish.

Thanks, Ed.

Thank you all for joining us.

I'd like to open the call by welcoming the employees and customers have vast disposal to the waste management family.

We closed the acquisition last week and were excited about the opportunity ahead to create value from this deal.

We're also pleased with the concurrent close with GFL environmental on the divestiture package I'd like to give credit to Richard Burke and the advanced disposal team for the great job. They did staying focused on operating our business safely and efficiently during the extended close period.

The next phase of our journey the hard work of combining these two great companies has now begun.

John will speak a bit more on this topic, but suffice to say, we're very confident in the long term value of the acquisition and the integration is off to a great start.

We're extremely pleased with our third quarter results, which are which were a testament both to our team's ability to optimize our business in a new environment as well as the progress.

The economic recovery in North America.

We've consistently pointed to operating EBITDA as the best measure of the health of our business and despite the challenging backdrop.

We delivered third quarter operating EBITDA results in line with last years record performance and expanded operating EBITDA margins by 70 basis points.

It's been said many times that great companies are able to emerge from tough times stronger than they were going in.

In that vein Wi.

W.M. has learned this year that we can permanently operate our business with a lower cost structure.

Despite a 2.7% decline in our third quarter revenues. The team was able to improve operating expenses as a percent of revenue by 110 basis points and hold SG nine expenses as a percent of revenue relatively flat.

This is the second consecutive quarter, where we've demonstrated this flexibility in a difficult operating environment.

And we're committed to holding on to operating efficiencies and cost savings as our volumes turn positive again.

In addition to proactively changing the cost structure of our business.

We're taking steps that propel us forward as a stronger more differentiated company in the eyes of our customers.

As I discussed last quarter, our investments in customer service digitalization or CST.

Our unquestionably the right approach and we've accelerated these investments to reap the benefits sooner.

So far this year, we've made considerable progress on this effort that will fundamentally transform our business model by offering our customers greater choice in how to interact with us and by seamlessly connecting the front end customer experience to our backend processes and we started to see the benefits.

Our online sales channel is our fastest growing sales channel and we've seen an increase in our conversion rates for customers signing up for new service when visiting our ecommerce site.

We've also made progress in automating a variety of operational back office and customer communication processes.

Which are paving the way for efficiency gains improved customer experience and further cost reduction.

To support our CST journey, we modified our our field sales structure to expand online and inside sales functions.

While reducing and optimizing outside sales coverage.

These adjustments are part of our long term vision.

To position our team to engage with customers on the customer's terms.

Improving customer satisfaction and engagement.

It also enables us to reduce our cost of new customer acquisition and improved sales performance at a more efficient cost.

We're confident that these strategic sales coverage adjustments, coupled with our digital growth strategy.

Better support our customers as well as the long term growth of the business.

[noise] recycling continues to show the improved results that we expected when we started to change the business model, providing stronger financial results in the third quarter.

In addition to our new highly automated Merfyn Chicago, we've opened a similar facility in Salt Lake City with another to open soon in Raleigh.

Using advanced technology at our recycling facilities is the blueprint for improving our cost structure, producing a higher quality material and being flexible to changing recycling end market demands.

[noise] recycling is only the beginning of our commitment to sustainability.

Last month, we published our 2020 sustainability report building value together.

The report describes how we are addressing challenges and opportunities related to the U.S.G.

And doing so in close partnership with our customers suppliers and communities.

Through the crisis of 2020.

We remain steadfast in our commitment to protecting the environment encouraged contributing to a circular economy.

W have as a leading voice in the call to create domestic end market demand for recycled content one of the ways. We're walking the talk is.

It is our collaboration with Cascade card solutions to develop and purchase residential carbonate with post consumer resin.

Another way is our investment in continuous materials, a company, which develops building materials from hard to recycle paper and plastics.

Increasing the value of the material that we process increases the economic benefits from recycling, which drives volumes and benefits the environment.

The shift in our operating model along with benefits from the acquisition of Adss and our progress in transforming the recycling business position us for a strong finish to the year with positive momentum heading into 2021.

We performed exceptionally well despite the difficult the difficulties presented with COVID-19.

Our results in the first nine months of the year give us confidence we can generate free cash flow in excess of $2 billion exclusive of MTS transaction costs.

As we also achieved the highest operating EBITDA margin in the company's history in the third quarter were confident we can exceed the high end of our guidance for full year operating EBITDA margin of 28% to 28.5%.

After all we've been through this year, what's most impressive.

As we expect to finish 2020 within a stone's throw of our all time high 2019 operating EBITDA for that I am eternally grateful to our teammates who have made happened this year in the face of difficult circumstances ill now turn the call over to John to discuss our operational results for the quarter.

Thanks, Jim and good morning.

Third quarter results showcase the strong execution of our frontline team members, who are safely and efficiently serving servicing our customers each day as well as the resilience of our business model as we manage costs and capital expenditures in this dynamic environment.

The teams hard work paid off with tremendous results as we improved operating expenses as a percentage of revenue a 110 basis points and expanded operating EBITDA margins 70 basis points.

We saw steady volume recovery across the collection and disposal business during the third quarter, improving volumes, coupled with collection and disposal yield returning to a healthy 2.6% generated revenue above our expectations.

We were anticipating a revenue decline of 3.5% to 5.5% in the second half of the year with the majority of that decline weighted towards the third quarter yeah.

Yes third quarter revenue only declined 2.7%.

The commercial volume suspended due to the pandemic almost 70% have resumed service and there's further cause for optimism in the CNS business as net new business and service increases versus service decreases were both positive and showed significant sequential improvement in the third quarter.

Residential container weights continue to be elevated mid to high single digits compared to last year.

Recovering the cost of interest increased waste as part of our conversation with municipalities as we work to improve the profitability of our residential business and change the structure of residential contracts.

And the residential line of business, our yield improved to 3.5% as we make progress on this effort.

External volumes for the third quarter were down external landfill volumes for the third quarter were down just over 8% with special waste volumes down about 12% and CND volumes down about 19% on to on a tough comparison in part due to the wildfire clean up last year.

Without the clean up from last year Sandy volumes declined about 7% landfill volumes improved sequentially each month in the quarter with total landfill volumes in September down less than 4% and CND and special waste each down about 8%, notably and this the MSW volume was flat for the quarter and September volumes increased nearly 2%.

Year over year, a powerful indicator of the progress of economic recovery.

Moving to pricing third quarter core price was 3.2% adjusted for the impact of lower volume core price would be 4.1% as expected pricing metrics are trending back toward pre pandemic levels. Following the intentional customer focused steps, we took to support our small business customers during spring shutdowns.

We're confident that helping our customers during a difficult economic climate was the right step and we continue to see increased loyalty from our customers.

Third quarter churn improved to 100 basis points year over year to 8.8% and we saw another boost in our net promoter score scores for all business lines. We measure in particular, our commercial business score more than doubled driven by higher scores for reliability flexibility and improved online resources, our pricing results reflect.

3.3% core price in both landfill and transfer businesses as we continue the positive momentum with post collection pricing initiatives.

We've been disciplined with our post collection pricing and we remain committed to staying the course.

Turning Ats no one has been more eager than me to welcome the Ats team to waste management and with the closing behind US we're extremely confident in the value of this deal will deliver.

We've got significant clarity on the Ats business and are pleased with the recovery of the business is shown as the economy as the economy has reopened we work closely with the Ats team for many months and are hard at work on integration, giving us confidence that we will exceed 100 million to $100 million synergy target despite higher than originally expected divestitures.

As Jim mentioned 2020 has taught US we can operate our business with a much lower cost structure than we have historically and were holding on to operating efficiencies and cost savings as volumes return.

The 110 basis point improvement in operating expenses as a percentage of revenue in the third quarter is evidence of our success.

When volumes began to decline in March we aggressively flex our routes in trucks parking more than 800 vehicles at peak declines.

This lower maintenance costs and allowed us to optimize volumes across the younger at lower cost portion of the fleet.

Throughout the pandemic route reductions Havent have outpaced volume declines in the commercial and industrial lines of business.

As volumes have returned we have been extremely disciplined and bringing back trucks into service driving improved asset utilization and helping keep maintenance costs low.

In the third quarter lower maintenance spending resulted in a 70 basis point improvement operating expense as a percentage of revenue we've.

We've also been successful in improving efficiency as each week since February we service more yards homes at hauls per hour than in the same period in 2019.

Increased efficiency was a key driver of less overtime in the quarter, while volume decreases across the collection and disposal business were in the mid single digits overtime was down 21% in the commercial and industrial lines of business and overtime was down 27% in the disposal business. The team is doing an exceptional job of managing it.

Expenses and I'm confident we are carrying forward the lessons we've learned on safely operating our business at a lower cost structure.

In closing I want to thank the entire waste management team, including our new advanced disposal team members for their hard work and dedication during trying times third quarter results exceeded our expectations on virtually all measures as we continued to demonstrate our ability to manage our operations in an uncertain environment I will now turn the call over to Divina to this.

Skus or financial results in further detail.

Thanks, John and good morning, everyone.

As Jim and John have discussed our third quarter 2020 results have demonstrated both the strong foundation provided by our essential services and resilient business model and the value created from the hard work of our team who are delivering each day and an increasingly cost effective way.

When we look at our third quarter operating and financial results as John just said virtually every metric exceeded the expectations. We set just three months ago.

Volumes have come back stronger than expected, we've flexed operating costs to drive improved margins and that's far better than our targeted efforts to keep them flat.

And we have seen improved customer account collection trends take hold.

All of this positions us to finish the year strong with organic revenue down in the range of three in a quarter to 3.75% versus the 4% to 5%. We projected in July targeted operating EBITDA margin of more than 28.5% and free cash flow in excess of $2 billion.

Others.

With revenues down about 2.7% from the prior year quarter, our operating EBITDA was essentially flat on a year over year basis.

This strong result, underpins net cash flow from operations, which was $1.029 billion.

An increase of 8% compared to the same quarter last year.

Over the course of the third quarter, we saw strong recovery in our customer collections and days sales outstanding.

Turning the expected headwind from working capital.

Additionally, our operating cash flow for the quarter includes the deferral of payroll tax payments under the care that which provided a benefit of about $40 million.

We continue to expect the full year benefit of payroll tax deferral to be $120 million.

Third quarter capital spending was $343 million, a $140 million decrease from the same quarter in 2019.

While we continue to prioritize investments in the long term growth of our business, we took prudent steps to reduce and defer certain aspects of our capital spending until we have better visibility into the pace of volume recovery.

The majority of the targeted reductions were the result of adjustments in landfill construction schedule and a decrease in the purchase of steel containers.

We expect full year capital expenditures to be between 1.6 and $1.65 billion.

Our business generated free cash flow of $691 million in the third quarter through.

Through the first nine months of the year free cash flow is $1.432 billion, a conversion of cash from operating EBITDA of 35%.

And as I just mentioned for the full year, we expect our strong operating performance effective management of working capital and disciplined capital spending to yield free cash flow in excess of $2 billion, excluding the impacts of 80, yes.

Our strong free cash flow positions us to reinvest in our business and return cash to our shareholders.

In the third quarter, we paid $230 million in dividends.

We remain fully committed to our dividend program solid balance sheet and balanced allocation of remaining available cash to strategic acquisitions and share repurchases.

With the recent with the recent closing and funding of the Ats acquisition, our balance sheet and liquidity remains strong and we are well positioned to continue our practices of sound investment and strong shareholder returns.

We financed the 4.6 billion dollar acquisition of Adss net of the $856 million in proceeds from the divestiture to GFL environmental with a combination of our credit facilities and commercial paper.

We continue to look for the right window to access the capital markets for long term financing alternatives.

Current and forecasted leverage ratios are well within the financial covenants of our revolving credit facilities.

We expect to quickly return to our targeted total debt to.

Total debt to EBITDA of 2.5 to three times.

There's no doubt that the lessons we're taking.