Transcripts
Waste Management, Inc. (WM) Oppenheimer’s 18th Annual Industrial Growth Conference Call Transcript
Waste Management, Inc. (NYSE:WM) Oppenheimer’s 18th Annual Industrial Growth Conference Call May 9, 2023 3:00 PM ET
Company Participants
Tara Hemmer – SVP & Chief Sustainability Officer
Conference Call Participants
Noah Kaye – Oppenheimer
Noah Kaye
Well, good afternoon, everyone. Thanks so much for joining us at day two of Oppenheimer’s 18th Annual Industrial Growth Conference. I’m Noah Kaye, Managing Director in Oppenheimer’s Sustainable Growth and Resource Optimization Practice. And we’re very happy to welcome back to the conference the leadership of Waste Management, Tara Hemmer, Chief Sustainability Officer, Senior Vice President. Tara, thank you so much for being with us today.
Tara Hemmer
Thank you so much. So happy to be here, Noah.
Question-and-Answer Session
Q – Noah Kaye
So we got into a deep dive a few weeks back on WM’s sustainability investments in RNG and recycling. And certainly, we’ll spend time on those today. But I wanted to add some questions first about WM’s overall sustainability strategy and how that drives growth because I think that’s become an increasing theme in the story over the last couple of years.
Let me start with the offerings mix. Last year, we’ve had this conference, I asked you what customers are asking for and what they’re willing to pay for on sustainability. And the follow-up this year is how have you broadened your range of sustainability offerings in response to customer needs? How are you integrating sustainability services into your go-to-market?
Tara Hemmer
Sure. It’s a great question, and we clearly are seeing much stronger demand from customers, and that’s only going to increase and be amplified. And I would really put it into 3 key categories. Customers want increased access to traditional recycling, they want greater data transparency and they want advisory services to help them manage the materials of the future. And I’ll touch on each one of those in a moment.
Access to traditional recycling, what’s fascinating is, depending upon where you live in the country, you might have great access to recycling as a service, but that may not be true across the entire country or even in Canada for that matter. So it’s one of the reasons why we’re making sure that not just with our work automation investments and new markets, but that our sales representatives have the tools in their toolkit to really offer recycling as a service to our customers and provide that information to them that our collection companies are structured in a way where they can make it easy for customers to recycle. A great example of that is our investment in automated side loaders and bigger bins at people’s homes.
While we’re doing all that, we’re seeing from commercial and industrial customers that they want more data and they want more data around what’s happening to the materials that they’re putting out and what it means, not just from a circularity standpoint, but also from a greenhouse gas emission standpoint, certainly larger brands and what may happen with the new SEC rule, if it gets implemented. Customers are going to have to report on their scope 1, scope 2 and possibly scope 3 emissions, and we can help them with that.
And then the third is, so many of our customers come to us and say, like, I don’t know where to get started. I need some help, or I have these harder waste streams that I’m really looking to tackle. And so we’re building out capabilities in advisory services and managed services so that we can have some of our team members help our customers on their journey and match some of our service offerings with what their needs are. So it’s an exciting time, and we’re definitely seeing this evolve.
Noah Kaye
Yes, I’d love — it feels like customer examples are always illuminating here. So I’d love for you to give us where are some of the customer examples where having a broader portfolio of sustainability services drove new customer acquisitions or meaningful same-store growth with .
Tara Hemmer
Yes. I’ll give an example in the consumer goods space. So we had a customer where we might have had — there’s roughly 3 or 4 locations, pretty large locations, but only 3 or 4 of them. And they asked us to come in and help them think through every material that they were managing and that include food and trash, it included traditional recycling, it included metals from some of their storefront, construction and demolition debris. All of the different things that could be managed within their portfolio.
And at those 3 or 4 locations, we were able to do a couple of things. We helped them save money in the process, which is always important to a customer. Also, what we were able to help them do is get different material streams into a reuse scenario. From there, they said, okay, we want you to do this at the next 15 to 20 locations that we have out there. And those were locations that we didn’t have, and we were able to apply that same cost savings mentality along with providing solutions, again, in the circularity space. And at the end of the day, over time, we increased our revenues with that customer over 10x. That’s pretty compelling.
We have another great example where we worked with a large big box retailer to look at everything that comes back from their returns. So when you go to a store and you return something, that may not end up back on the shelf for some reason, maybe it’s a damaged or there could be something else that’s wrong with it. So we worked with them to bring all of those returns back to a centralized location, and we helped them sort of do some sorting on what could get reused, what can get resold and where could we take those materials if it was at their end of life and expanded that to a couple of different distribution centers and increased our revenues with that customer over 4x. So this is about really thinking of WM as a materials handler and thinking about where those materials could go.
Noah Kaye
Very interesting and helpful, Tara. I mean the first 2 levers you mentioned, increased access to traditional recycling and greater data transparency, I think those, maybe they’re not straightforward, but they seem straightforward relatively to us and to investors. The advisory services part of this is where it starts to get really interesting.
I think back to a couple of years ago, Jim was talking about redesigning the Starbucks cup and lid, whatever. The point is helping companies think about product formulations and product packaging differently to enhance that circularity and lower cost. Where is WM in that journey? Where is that actually impacting the business?
Tara Hemmer
Well, I mean, I think the reality is when you look at the world’s toughest problems, the way we’re going to solve them is through the power of partnerships. And so an example you just use related to packaging, it’s not enough for consumer products companies to put a label on something that they’re putting out there that says that it’s recyclable, and if our MRFs can’t figure out how to pull it apart and get it to a market, then that recycling label is meaningless.
What we’ve done is we’ve really collaborated with large CPGs, with packaging coalitions to say, okay, what can our systems handle? And as we evolve our systems with this phenomenal automation investment journey that we’re on, where we’re going to be creating higher quality material and we’ll be able to look for more material types, how can we adapt these things together?
And we’re definitely seeing momentum there. Some of the larger brands that clearly have a lot of clout in the CPG space and also in the large retail space are putting together packaging for recyclability. And that’s super helpful because we want to make sure that these materials, when they end up in the stream, can be returned to .
Noah Kaye
So tying this into revenue growth. You discussed the shift for national accounts towards putting more value on these services. And I believe national accounts are still sub-10% of the book. How does that growth rate compare to kind of the average for C&I? If you go off the current pace, when might you exceed that 10% figure?
Tara Hemmer
Well, I don’t know about the 10% CAGR. What I can tell you is really over the last several years, we’ve been able to double our national accounts revenues. And that really is because we are differentiated. If you think about large national accounts, their needs are typically more complex, and they tap into different service types that WM has. We have the largest network on the solid waste side. We also have a brokerage network that is critically important if you drive the alley or the back of house at some of these large retailers. They all have cardboards that they’re baling. Recently, they have film that they’re looking to find homes for. They have off-spec material from their locations.
And so their needs are complex. They also have to provide data, not just at the store level, but if you think about their company’s own sustainability reporting, they need to provide that data. So sustainability is increasingly important. And then what we found, in particular, over the last 2 to 3 years with some of the tightening in the labor market, reliability of service is absolutely critical. And so we’ve seen some customers, who might have left WM over price, go to other service providers. And within 6 to 9 months or a year come back and say, we didn’t fully appreciate the value of working with you, and they’re coming back at an even higher price point.
So that bodes well for us to really drive greater share in that space. And it also helps us with asset utilization across our entire network. Many of our area vice presidents, they’re really excited about the national accounts business in that realm.
Noah Kaye
I think there was some perception in the past that — and they still exist today amongst clients, that national accounts are inherently lower margin or are more prone to margin compression with the economic cycle. Talk about that, what kind of visibility you have in terms of the sustainability of margins of those accounts.
Tara Hemmer
I think what’s clear is we are growing and expanding margins in the national accounts business. That is what we’ve been able to do over that journey. It’s not just about increasing the size, but we’ve also increased the size and increased the profitability in the business. And I think that really comes down to differentiation and sustainability to be part of that.
Noah Kaye
Great. Any finer parameters you can put around that margin expansion?
Tara Hemmer
Like if it — if or when it would get above 10%?
Noah Kaye
Well, no, just in terms of what the margin expansion has looked like, right? And was this a 25% margin business that’s going to 30%, something like that?
Tara Hemmer
I think it’s one where — and most of that business is commercial. It’s — the majority of the national accounts business is within the commercial line of business. So I don’t know that we’ve ever put a on it, but consistently year after year, we’re seeing improvement and that’s what we’re going to strive for.
Noah Kaye
That’s helpful. Now some industry peers have leaned more heavily recently into industrial services and even hazardous waste management. You have a presence in this space. You already have hazardous waste assets. But we don’t often hear about that part of the business. And to me, it seems like sustainable materials management in this sector is really value-added. So how does WM view that space in terms of growth potential or any incremental focus?
Tara Hemmer
I’m glad you asked the question. I think sometimes it’s because we have so many positive things going on that often, we leave some of the other positives out and certainly the industrial side of our business is critically important. As you mentioned, we have a network of hazardous waste landfills, but it really goes beyond that. Our industrial services sector, where we increasingly are doing industrial liquids processing at customer locations, we are actively thinking about what our response is going to be to PFAS and creating solutions for PFAS. We are looking at and have a patent out there related to biosolids and PFAS. And all of these are pretty complementary to a lot of the customers that we already touched.
Many instances, we already have a strong presence at manufacturing and industrial customers. And they’re looking for solutions for these more complex waste streams, some of which that may not be able to go to a traditional landfill. So we have trucking capabilities where we can move material that [Technical Difficulty]. Very sorry. I don’t know what happened.
Noah Kaye
It’s all right. It gets in the way sometimes. Tara, I do want to actually pick up on your point about PFAS where everyone is going to perk up their ears. Still a lot of uncertainty around PFAS regulation in the industry. You mentioned this patent related to biosolids and PFAS. If not settled at all in terms of how to handle that and how to dispose of it, how could this be a tailwind for WM?
Tara Hemmer
Well, we’re in a unique position because if you think about it, so many of our landfills are located in areas where there are likely going to be significant PFAS clean ups and there are things that we can do, depending upon how EPA thinks of these as a waste stream, including mono filling material. And we’ve successfully done that with full combustion residue. We also have an arm that rolls up within [indiscernible] called Remediation and Construction Services, where we have worked on excavating coal combustion residue from large power plants and we did transfer some of those capabilities to help with some of these cleanups and have some of the material come to our facilities.
We’re trying to be thoughtful about it because there’s still a fair amount of unknowns and certainly what’s happening with the drinking water standards, which we are subject to. We’re going to watch all this and make sure that we can tap into this as an opportunity for WM.
Noah Kaye
That’s very helpful. Moving to recycling. Before we talk about the new investments, just give us some perspective on where WM is now at with the economic model just in terms of creating a higher floor, independent of commodity prices, and where you want to move the model to over time in terms of further reducing volatility.
Tara Hemmer
So we are so proud of this. We worked really hard to fix the operating model here, and we’re proud to say that we really do now have a fee-for-service model. In fact, one of our contracts that was probably the biggest laggard and drag finally sunset. And so virtually all of our contracts now are in that fee-for-service model, where we get paid first for processing and then if commodity prices are high, there is a revenue share with customers.
And I think what’s really important to point out is if you go back 6 or 7 years when commodity prices were 70% higher than what they are today, the EBITDA that we’re planning for from the recycling business in 2023 was roughly the same. So that just speaks to the fact that we’ve improved the profitability of this business and done it in any commodity price environment. And I want to be clear because sometimes it gets misunderstood when we have dips in commodity prices like we saw in Q4 or Q1. This is still a very profitable business for WM and certainly strong return on invested capital.
Noah Kaye
Yes. I mean, to your point, that’s a higher floor and we can see it now. There is — and I think this is true across the industry, right? There’s still some sensitivity to the commodities. Does that sensitivity potentially lessen over time? I mean, especially the floor side, but does the sensitivity lessen over time? If so, how could that be the case?
Tara Hemmer
The sensitivity, I’m not sure that it will lessen over time. Like we’ll always have some sensitivity to commodity prices just because of the way that revenue shares are structured. But what we should never have is a situation where this business is not profitable, and that was the case going back 6 to 10 years ago. That is not the case today. We will be able to have a resilient business model that makes money and has appropriate returns in any commodity price cycle. That’s really what we were trying to structure.
Noah Kaye
And by the way, your decrementals on this decline have been very healthy, right? And certainly, the brokerage part of the business helps with that. But I think as we tie that all together, it does seem more sustainable from an economic standpoint than it was many years ago. And so when we think about the Sustainability Investor Day and the granular assumptions you provided around the size of recycling investments and the different profit pools you’re expecting to come out of those investments, just how closely do those assumptions tie into what you’ve seen at your leading automated MRFs? And are you embedding any further improvements in productivity into the outlook versus what you’ve seen to date in places like the MRF of the future?
Tara Hemmer
Yes. The best example that we have, and it’s the one that has come online most recently, is our Houston MRF. And our Houston MRF, we’re seeing, again, 30% improvement on labor, which aligns really well with previous MRFs, including the Chicago MRF of the Future and Salt Lake City. And we’re very confident that we’ll be able to get that benefit. I think the thing that we haven’t highlighted as much in seminars and webinars like this is the safety performance improvement that we see in automated MRFs north of 40% improvement in our total recordable injury rate, which is huge for us.
And then on the revenue side, we’re seeing significant improvement on our ability to upsell based on revenue quality. And all of this, we’re looking at all the metrics now across every automated MRF and comparing them to the nonautomated MRFs. And you can see very clearly the improvement. Those numbers are what we’ve baked in on the Sustainability Investor Day. We, of course, are always going to look for ways where we can make improvements and hopefully ramp those up even higher than what we committed to.
Noah Kaye
Right, right. So any kind of further technology improvements or process improvement is upside to the outlook.
Tara Hemmer
Exactly.
Noah Kaye
That’s great. You’re the largest recycler in North America, right? And it just strikes me that if you’re meaningfully improving bale quality as one of the effects of going to this automated system, that just opens up a lot of possibilities for circular reuse. Maybe you can talk about your investments in Avangard and some of the opportunities you’re most excited about in recycling or up-cycling, if you want to call it that.
Tara Hemmer
Well, the improvements in bale quality, I’ll start there. And it’s really — it’s so important because if you think about some of the states in California and New Jersey which — with minimum content legislation, and if you think about the Coca-Colas and Pepsis of the world, who are really trying to get more material back to bottle to bottle, we’re already seeing in our automated MRFs where we have higher quality bales, they’re interested in buying those bales, right? And others are interested in buying those bales because it’s a cleaner, higher quality product.
And by doing that, we’ll be able to unlock other opportunities within our network. And so speaking of those other opportunities, you mentioned Avangard, which we call Natura PCR, just to confuse everyone, but that’s the name of the company that mechanically recycles film and converts that into a post-consumer resin or PCR pellet that can be blended in with virgin pellets to produce new products, primarily in the film space. What’s so exciting about this is there’s 2 key opportunities. I’ll stick with the MRF thread first.
We have a partnership with Dow where we’re testing the ability to take film in our automated MRFs. And why is this so important? Well, I ask all of you to go home and look in your kitchen trash bin and look at what’s in there, and it’s all film. It’s over wrapped from the 24-pack of water bottles that you might have purchased or it’s film from your online shopping habit, which I know I have, I’m sure you all do, too. But if we can find ways to capture that and be able to put it into the traditional recycling stream and pull it out with technology, there is very strong demand for that as a product.
And likewise, on our national accounts business, I mentioned back of house, we have cardboard. All those loading docks, for the most part, they have film because there’s film that comes wrapped around the pallets or also in take-back programs at front of store. And if we can build a solution where we can get that material back into a circular stream, it can go into any multitude of things. And this is a great example of building a capability that really doesn’t exist in the space today.
Noah Kaye
So let’s end with RNG. I honestly could spend the whole time on this, but we’ll just do 4 or 5 questions. So we’re 1.5 months away from the EPA’s deadline to finalize the 2023 RVOs. You and the industry have been working to demonstrate that RNG growth will be more robust than the draft proposal and that the D3 RVO should be increased. What does the industry think is likely to happen with the final rule?
Tara Hemmer
Well, like you said, I mean, the industry and many others have really been trying to educate EPA on the supply that’s come online and will be coming online over the next 3 years. I think EPA is really trying to be thoughtful about the amount of comments that they received and really understand the problem because at the end of the day, their goal is they don’t want to — they want to support the growth of RNG as a transportation fuel. And they don’t want to be introducing volatility that it is something that they heard loud and clear several years ago and all sides shared in that.
I think we’re optimistic that they’re taking these comments into consideration. And if they do raise the RVO, we think that there could be a bit of a price bump on the RIN side in 2023, but cautiously optimistic.
Noah Kaye
Yes. There was also an article suggesting — in the media suggesting that EPA might move the e-RIN rule making to another track so as not to delay the RVO process. What’s your view on that? And I guess, more broadly, what guidance might WM have for the EPA on how to develop a sustainable and high-functioning e-RIN market?
Tara Hemmer
Well, on the EPA front, they’re legally obligated to issue an RVO from the renewable fuel standard, and that really applies more to the conventional biogas pathway. So them separating it, a delay on the e-RIN front, our hope would be that they wouldn’t delay it. But if they do, that it’s not a long delay because, obviously, it has a significant impact and a lot of upside for WM given our network of landfill gas and electricity plans.
I think what we’ve been trying to share with the EPA is we want to make sure that one doesn’t impact the other and that they’re truly additive. So there’s room for both, and we want to make sure that the introduction of e-RINs, say, doesn’t sort of devalue the investment in R&D and likewise in the opposite. So I think it’s a bit of a needle that they’re looking to thread, but they’re really trying to be thoughtful about this and I think that may be a little bit of what we’re hearing.
Noah Kaye
Okay. That’s really helpful and something we’ll look forward to seeing play out next month. I think one item that surprised us at the Sustainability Day was your OpEx number, $6 per MMBtu to run the plants. We’ve seen the industry tracking closer to $8. What operational improvements have you made to kind of get you there? Is it also appropriate to think of the $6 as fairly independent of plant size? Or does it really depend on scale?
Tara Hemmer
So I can’t really speak to what other companies’ operating costs are, why they are structurally that way. What we would say is we have 4 plants that we’re tracking and that sort of fit in that bucket. And that has been our experience from an operating cost side. Now our plants tend to be a little bit bigger than perhaps maybe the others that are talking about operating costs. And certainly, the ones that we have in the pipeline, we need some pretty big plants in the pipeline.
So certainly, smaller plants, you might see that trend closer to the $8 number. But certainly the larger plants and larger-sized plants, we’re confident in that $5 to $7 range.
Noah Kaye
Right. I mean, really, the — what matters here is the total quantity of MMBtus produced. And obviously, the MMBtu per plant that you’re bringing on, we can all do the math, is substantial.
Tara Hemmer
Exactly. And we’ve learned how to be — maximize efficiency within these plants to maximize revenue quality.
Noah Kaye
Yes. Yes. I guess, just in terms of the offtake arrangements here, you — and by the way, I mean, we’ve regularly discussed this topic, right, RNG offtake and how to trade off upside versus . And at Investor Day, you announced this 50% through your rolling offtake strategy. It was probably related to the early years. Maybe talk to us about how you’re approaching the voluntary market and how you see the share of voluntary versus transportation offtake trending over time because, obviously, the voluntary market could afford some longer-term visibility to you.
Tara Hemmer
Yes. The voluntary market is rapidly emerging, and we’re seeing several states that have blending requirements for public utilities to blend renewable natural gas in with their traditional natural gas and then also [indiscernible] is another great example. So as those are evolving, we’re looking at how can we tap into those markets and structure agreements in the right way, recognizing that if you think about it, we want to structure this almost like our debt maturity portfolio where you have longer-term agreements, you have shorter-term agreements.
And our hope is, as both of these markets emerge and evolve, we’ll be able to do short-, mid- and long-term agreements in both the voluntary market and the transportation. Obviously, for WM, we’re a bit unique because we have this compressed natural gas fleet, and we’re able to match our fleet to our renewable natural gas production and generating a RIN without giving away any of that value. So that’s an important consideration as well.
Noah Kaye
It’s a great point, that internalization. I guess, the last one here is that the industry has seen some share of project delays over the past several years and that can be permitting, equipment shortages, kind of typical for a growth industry. Just what gives you confidence in standing up the projects you forecasted through 2026 on schedule?
Tara Hemmer
Well, I think the most important thing is we view these projects, it’s a portfolio of projects, and so we’re always looking at which project is maybe moving behind, which is moving ahead, how can accelerate certain ones while other ones might be slowed down for any number of reasons. But in that portfolio view, we’ve done a couple of things. We were very intentional about tapping into the supply chain and procuring the bigger components on sort of a — not on a project basis, but again, on a portfolio basis, so we can move those pieces of equipment around as we need to based on how projects are trending.
We also developed standard designs for these projects where we have a small size, a medium size and a large size so that plants are the same, and we can just basically plug those in at locations. And we’re actively working with all of our areas on the local permitting that’s going to be required. So I’d say that sustainability is a team sport and renewable energy is a big piece of that.
Noah Kaye
Sure, sure. Listen, as always, a terrific conversation, and we really thank you for the time here. For anyone who would like to do more work on WM and its sustainability strategy, please don’t hesitate to reach out to us as well as to Heather and to Ed Egl to learn a little bit more. I hope everyone has a great rest of the conference, great rest of your day. Thank you so much for joining us, Tara. Thank you.
Tara Hemmer
Thank you, Noah. Have a great day.