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Waste Management, Inc. (NYSE:WM)

Raymond James Financial Inc. Institutional Investors Conference Transcript

March 4, 2014 2:50 PM ET

Executives

Jim Trevathan - Chief Operating Officer

John Morris - Senior Vice President, Field Operations

Ed Egl - Director, Investor Relations

Analysts

Bill Fisher - Raymond James

Bill Fisher - Raymond James

Good afternoon. Like to go ahead and get started the next presentation. Well, we are very happy to have Waste Management with us today, obviously the market leader in the waste management sector. The company continues to focus on pricing productivity initiatives and also generating some very strong free cash flow and those one of the highest dividend yields in the space and I’d like to welcome management from the company, Jim Trevathan, who is COO; and John Morris, who is the Senior Vice President of Field Operations; and we have Ed Egl, Director of Investor Relations. Jim?

Jim Trevathan

Thank you, Bill. Appreciate it. Thank you for the opportunity to tell our story and let you see how we’ve progressed over the last year and what we expect for 2014 and beyond. We are, let’s say, let get through, I guess, you all can read that at your leisure.

We are the industry leaders as Bill said. We are proud ourselves in that. We generate strong return on investments, the strongest in our industry. We give back cash to our shareholders. It’s the absolute foundation of our company, last year $900 million -- $922 million to be exact and cash given back to shareholders little over $600 million of that in form of dividends and about $300 of it in share buyback. We are in the top 10% of dividend paying company with about 3.7% yield at today’s price.

From an asset standpoint, as the leader in the industry, we are set up nicely, across North America especially. We from a revenue standpoint, or free cash flow standpoint, or CapEx, we have done well the last of couple years.

Sustainability is the absolutely the core of what we do. Our customer desire sustainable solutions to their issues and we are the leader in that regard and I will show you some other information in that regard from an asset standpoint, the leader from the landfill perspective. We have got 270 or so operating landfills, about 125 recycling facilities, no one close in the number or the breathe of coverage across North America from a recycling standpoint and our customers absolutely expect that.

We have hazardous waste capability as well, the six facilities across North America, from the northeast to south to the west, western part of the U.S. and therefore can give a full service offering to our customers.

A strong play with the natural gas pricing today. We -- 90% of the trucks that we buy. We have about 15 -- 16,000 trucks on the road everyday and we -- about 90% of the purchases are for compressed natural gas trucks. So we are getting that efficiency out of our fleet and we are also solving some their issues around cities that our customers expect us to solve.

You look at the asset base and you look at it versus our largest competitor from just a traditional asset standpoint, we are by far the larges in our industry. Waste conversion, I mentioned, the recycling capability, waste energy plants, we are the largest and in that natural gas from the fleet standpoint.

We get in value out of the trucks some where around $30,000 of fuel efficiency per truck per year every time we put it on the road cost us $2,000 more for that truck, but we save that in maintenance cost. We don’t have all the diesel air emission issues that we have in older truck and we are getting real value out of that and we continue that investment in that industry leadership.

From a revenue standpoint, we are by far the largest income from operations as well $2.1 billion and then the net cash, we are cash generating business and as I mentioned earlier, we give it back to our shareholders.

It’s -- from operating income standpoint, last year we moved forward in both margin and in dollars, earnings, in all of our collection lines of business, even with the volume issues and I’ll show you in a minute. So it was a good year led by our yield leadership as well.

From a revenue standpoint again, from the annuity like revenue strength, about 80% of our business is contracted for three or more years, that’s both municipal city, about the third of our business but our both landfill business, as well as our collection business have extended contracts that allow for that annuity like stream.

Average churn rate on our commercial and industrial customers and that 10% range in way for the 35 years I have been with the company, little higher than that right now but around 11% but not dramatically different than the long-term history of our company or our industry.

Municipal customers on average, they were just 12 years when you factor in the length of time. Those contracts on the resi side are in that three to five year period. So we renew the majority of our business and we’ll continue to do so. So strategically what are we trying to accomplish.

We’ve got three pillars that we say are the core of our -- of the strategy. Non-financial aspects but tied directly to the financial results of our company and one is to differentiate ourselves in our industry where possible to know our customers better and service them better than any one in our industry.

We’ll talk a little bit more about that but it really is about adding some technology to for the largest customers, the cities and our largest national account like customers that at multiple locations are looking for reporting capability around sustainable solutions. They are looking for some consulting help around sustainable solutions. And we have the entities, group of people that are truly experts. They go and help our large customer or city.

We cycle more material, reduce the waste stream. We have the collection capability to that mix and therefore handle their business over a longer term that we think our competitors do, helps us retain that business better than we have in the past. We are also as a core principle going to extract more value from the waste stream than we have in the past than any one in our industry.

We do that through the asset base, recycling capability but we’ve also invested in some technologies that we think over the long play will help us in that regard. We have a plant in -- a full scale pilot plant in San Antonio, Texas. We’ve just built the first full scale plant in Philadelphia.

We take MSW right off the street and we are turning it into a pellet. About half the material straight off the street, exactly what we would collect for a city or a municipal business, we run it through the process and make a pellet. It’s about the size of my thumb and we use it as a coal replacement. It’s got certification from EPA as a clean energy.

We’re getting first plants in operation. In Phily, we’re going through the normal, get the bugs out of it now and late first quarter we’ll be operational. We sell the material to cement industries. Several plants and then the Texas plants generates a lot of construction, allowing that simple Texas area, cement industry loves the material because it burns so much cleaner than coal and it’s a renewable energy.

Philadelphia, we’re selling it. We’ve got a couple of industrial entities that are looking at the material. We met with their CEO couple of months ago. They are testing the material. Again there is a coal replacement in the boiler and the manufacturing plant and they like that green aspect.

Is this going to dramatically change the industry in the short term, no but we are investing in technologies that over the long term we think can add real differentiation to our model.

Then the last thing that we’re doing is just driving efficiency and innovation. We are the first in our industry. We got 92% of our trucks, have onboard computers. It’s lot different. It’s very new for our industry, not so much so for the FedEx and UPSCs. Maybe some would say we’re 10 or 20 years behind and I won’t argue with you there. But we’re putting in place processes and routing tools and capability to more efficiently route our truck as volume changes occur and as we look for shareholder and cost saving opportunities.

So customer needs that. I have already talked to a couple of these issues and will spend a lot of time there. But our largest customers are looking for that sustainability. They want us to help them get there. And we do that through that consulting organization and through an engineering team that can truly help them design a process, large customers.

We’re not talking about the small mom-and-pop restaurant but large manufacturing entity or chemical complex or even grocery chain. We can help them improve some of those sustainable solutions and be differentiated in the market place in just a small mom and pop and offer a solution instead of just service itself.

Obviously adds value, we think over the long term. It helps our balance sheet but it really help theirs because we as the largest in the industry, deep pockets around the liability protection. We offer them with land disposal whether it’s MSW or hazardous waste and they appreciate that kind of balance sheet capability.

Extracting value from the waste stream, three places where most of our attention goes. Our waste energy business, we generated 7.5 million tons or we processed 7.5 million tons of solid waste material over 8,000 homes. The renewable energy from our landfills, we begin this effort couple of decades ago, we piloted the work. So we captured the methane from the landfills and sell it back either directly to an energy source that they are plant is closed by the side, BMW plant in South Carolina that we pipe the methane straight there and they used this energy for their plant.

Majority of the times we generate our own site and we turn it into electricity and sell that electricity on to the grid. A not well-known fact but an absolute fact is that today, might not be true in two or five years but absolutely true today. We generate more energy from methane gas from our landfills that all of silver energy companies in North America combined. So this is the valuable part of our business that get a lot of publicity, but it’s the right thing to do is materials, decompose and recapture that methane.

And I mentioned, the new technologies, I mentioned the SpecFUEL plant in San Antonio filling, several other smaller investments that over time will pay off. By now with energy prices depressed and rightly so, helping the economy somewhat with natural gas exploration and oil production in North America, they’ve flatten that energy curves. Some of these technologies will take longer to come to fruition. I think that SpecFUEL plant necessarily has the best shot at shorter-term gains.

So how are we going to get that cash that we had guided you toward in ’14 and what occurred in ’13 as well? Yield management is a big part of what we do. We are the energy leader and not anyone really close. Given that fact, we have to be the price leader in the industry and we believe that. I will talk a little more about it on the next slide when I show you numbers.

A lot of cost issues, John will talk about one or two of them, but we restructured our company 18 months, almost two years ago and took out about a $135 million in SG&A costs, just took out a wager of our company and so John’s staff is running half the company is our corporate staff. We’ve eliminated a crew if you will, four or five of them around the company with staffs that have landfill capability and collection capability, routing capability or pricing. And we’ve centralized that in corporate and just taken out and you have seen the results.

We’ve maintained that SG&A number in raw dollars from ’12 to ’13 and we will do the same in total dollars ’13 to ’14 and that as a percentage of revenues. So you will see that SG&A percentage comes down to pretty close to 10 and still some upside to go. On cost side, John will get to some operating issues in a minute. CapEx, we have a real discipline around the CapEx, how we spend our money and where we invested, especially at the landfills of getting a little more stringent about spending money.

We are now about to put at risk those facilities. They are actually one of the foundations of our company and our industry. But we are squeezing capital there to make sure that we return the right cash to you, so we have investment opportunities or other opportunities.

So volumes, lot of attention around volumes over the last few years. I had a couple of things about this chart. First of all, this is MSW, waste-to-energy tons and nationwide. This is the North American view. Post what we see before recession, little bit of reduction around recycling as cities and communities and industry recycle more material. You will see that. You will also see the recession. Our recessions absolutely had an impact on our volumes industry wide and then you see in the last couple of years, starting to come back so and we believe rightly so.

Also, so is the GDP growth in our battery, fairly, fairly conservative today. But the recovery has started and we think it will continue. So yield, I mentioned that yield is a big part of what we do. It’s the leader in our industry and we will continue that in ’14 and beyond.

One of the messages we discussed earlier today was that unlike consumer products, changing our price point, not sure anybody else in our industry. When we change the price, it doesn’t increase or decrease the volume of waste material generated. What’s generated in the economy is there regardless of what the price point is.

Nobody makes more waste because the price is low. It makes less because it’s high. It’s there because of what’s going on GDP wise or population growth. Given that fact, we think as the industry leader, we should be the leader in price and we are. We absolutely are and we see that in our yield numbers for all three of those collection lines of business. You see some impact from volume, but the trade-off was absolutely worth that leadership role.

Income from operations grew three lines of business both in dollars and in margin, every quarter last year sequentially getting better and all of last year in the second half of ’12 as well. So right strategy, given this is not a huge growth business from a volume standpoint, although the trend is starting to move in the right direction and we believe it’s the absolute right strategic play.

With that, I will turn it over to John who will hit a couple of the operational reviews.

John Morris

Do you mind driving over there Jim as a quicker?

Jim Trevathan

Yes.

John Morris

Thank you. So Jim talked a lot about kind of the revenue side and what we’ve done on the yield front and on the volume front. I will take a few -- I’m going to go quickly through here. If you have a question, please stop me or save it and I will answer it at the end.

So obviously increasing earnings through cost is the other side of the equation when you move away from revenue and yield. And there is a couple of ways we’ve talked about over the last probably six to eight quarters on how we’re doing that.

One of the things we’ve done is after the restructuring, Jim mentioned, we basically divided the company in two halves, north and south. I have the south half. There is 17 geographic areas that makeup kind of the core business, notwithstanding our Wheelabrator component. And essentially the first bullet there is every month, every quarter for all 12 months of the year, we are doing operating reviews with each one of those 17 area VPs and obviously their staff to ensure that the things that we need to get done are getting done month in and month out.

We talked about around the restructuring that there was 300 basis points we’re going to look to chase out of the business, the first 100 basis points Jim touched on which is really the SG&A piece which we have taken out and have stayed out. There has been a lot of questions on the calls, even recent ones about whether or not we’ve been successful in keeping that out and happy to report that has -- that those costs have stayed out of the business.

The second bullet there really talks to kind of some of the operating strategy we put in place, we’ve routing and logistics up there. There is really three legs to that stool. One of which is Jim touched on briefly, we’ve done maybe investment and putting technology on virtually every one of our trucks. We know where everyone of our trucks is everyday all the time. And for an industry like the waste business, welcome to the 21st century. For a lot other companies in the logistics business, they’ve done this a long time ago. We are starting to see value out of that.

The second leg of that stool really is that we’ve assembled the team of routing engineers. The business is dynamic. Jim talked about the churn rate of the business been historically about 10%, which means we’ve got customer churn that’s occurring everyday. We’ve got a team of experts now they are house centrally in Houston that the network with each of our 17 areas to make sure that from a routing standpoint, we are efficiently dispatching and deploying our assets on a regular basis.

And then a last piece of it is really around the management cadence and we will go in a ton of detail there, except to say that we’re in the process, we’re about 20% of our way through our 400 operating locations and kind of instilling a management cadence, that’s going to be similar to each one of those 400 locations.

Historically, our business and particularly our company has been a little bit more entrepreneurial in this regard and we’re trying to add a certain cadence to the way we’re deploying our collection assets everyday regardless of what location you go to.

In the last piece, last 100 basis points is really on the backlog of streamlining. Some of that we’ve done already. Here about our RMC center, that’s already consolidated. In Phoenix where we will be done with the billing, consolidation issue will be billing out of central location and then there are some other efforts that kind of that fall into that back-office title. They are going to happen over the next 12 months. And this simply puts us just in illustration of the timing on that between it’s hard to see ‘13, ‘14, and 15 and the three green block at the bottom.

So move over to cash flow and capital management, obviously Jim touched upon capital been about a $1.3 billion, we expect to spend about the same next year. Well, how is that happening and we’ve have been posting really interesting questions about well, if you’re not spending as much capital, are you taking that, where are you taking that from? It’s not coming out of the core business. We’ve spent a good bit of money as you focus in over the last couple of years and there was cycling infrastructure piece. We feel like with a very few exceptions, we are pretty. We are well built out in that regard. So that’s one example of where we’re not going to spend as much money as we have historically.

Jim mentioned also on capital discipline, we’re taking a much more stringent approach on the landfill side. Maintenance capital on our business is $800 million to $900 million a year. Virtually everyone of those dollars comes across my desk and Jim’s desk on a monthly process where we sit down and go through all those. I think you’ve seen some of the early results of that in ‘13.

Incentive comp obviously helps to drive that behavior. Our 17 AVPs and folks on our teams have compensation plans that are tied to how we do from a cash flow standpoint. And I think Ed will correct me if I am wrong but for 2013, we actually in a last couple of years started to see ROIC come back the other way. So what we’re doing is working.

For illustrative purposes here, from an ROIC standpoint, this is kind of a range when we look at some of the traditional business in collection and landfill, 12% return on invested capital. This is based on a lack of about between 7% and 8%. And then as you can see we moved down, recycling and the organic growth projects, which are traditionally the more risky. Obviously, you can see the higher returns on the waste-to-energy side which really is we haven’t done any of that in the U.S. in a number of years. We had a couple potential projects, but most of our activity there as you folks know has been overseas.

Highest returns here, again I won’t spend a whole lot of time here. I think you folks can obviously all read the graphs and know what our returns look like, go through the performance outlook here.

We did receive a bunch of questions, Jim. Jim and David did on the phone on kind of how did Q4 look compare to 2012? And as you can see, the accrual column three over to the right there -- before it was a right, excuse me. If you kind of normalize that and you look at the core solid waste business, we had a pretty strong quarter year-over-year when you take out the headwinds in 2013 Q4 versus ’12.

Shareholder return, obviously you can see that we kind of get out of the market there on the share buyback side into 2012. I think Jim mentioned earlier, we’ve got authorization for up to $600 million for the board in 2014. And as you can see, we start to get back in the market here in 2013.

I guess the story is here is that what you’ll see is that our dividend has growing a pretty good clip in the early years. In the last couple of years, it’s kind of moderated. And you can see at the top 3.7% at $41 share price about where we are. And I think that board just authorized dividend that we will put it at about 3% for 2014.

Guidance, you can see it’s $2.30 to $2.35. We finished the year at $2.15, so that range puts us right at about 6.9% to about call it [7.9%] growth. Jim touched on the yield being obviously a critical element of our earnings growth year-over-year.

Volume, still again we expect that to be at about negative 1%. And if you look at our ’13 results, that’s a trade-off we’re still going to make. And free cash flow again is going to be right in a $1.3 billion range. And we don’t see a lot happen on the CapEx side different than in 2014.

So, with that, I want quick any questions for Jim or I.

Question-and-Answer Session

Unidentified Analyst

(Inaudible)

John Morris

Well, if you look at the solid waste business and accruals that I think there was $0.06 of [AIP] related accruals that we did not have in 2012, this would in pay bonuses and the other $0.03 said was yes some risk management adjustments.

Unidentified Analyst

(Inaudible)

John Morris

Yeah, we’ve certainly gone through a number of reviews of that. Obviously, a lot of our competitors don’t do that. When you talk about some of the sustainability initiatives our customers are asking for, we see some value in it. And honestly, that’s a hard number to put your thumb on and it really dictates whether you’re getting exactly the value you’re paying for it. But it’s something we continue to scrutinize quarter in and quarter out.

Unidentified Analyst

(Inaudible)

John Morris

So if you look at just simply our core price which is what we put on the street net of rollbacks, I think there was 3.8% for the year. From a CPI standpoint, about 35% of our business is driven off of CPI. So when you look at your core price results, obviously we’ve been more aggressive outside of that business, that’s driven by CPI to achieve almost 4% core price. I’m sorry, what’s the other part of your question?

Unidentified Analyst

(Inaudible)

John Morris

Well, I think, part of what we thought, right and as Jim touched on is we get questions, the good bit about the volume trade off that comes with the pricing and if you go back a few slides to Jim’s presentation, what you see in all three lines of our collection business is even though we have traded some volume particularly in the commercial side we are still growing margin and we are still growing whole EBIT dollars and frankly, we still think we have got a pretty good amount of freeboard before we have to worry about kind of hitting that tipping point. But it’s something we watch very carefully and it’s hard to generalize that because we got 17 areas which buy 125 MSAs, major MSAs around the country. So it’s hard to generalize but we have got 17 ABPs, we are doing the same math in each of the regions.

Unidentified Analyst

(Inaudible)

John Morris

Yes. We do not.

Unidentified Analyst

(Inaudible)

John Morris

Yeah. I think, some of the markets where we have seen real sluggish volume numbers, we are starting to see some improving metrics, Florida being one of them. I think Arizona is another one where we are starting to see some improve numbers, I’m not going to get excited about, but we are starting to see some improve comps. I think California which is also part of -- my part of the company. We are starting to see some modest improvement too, so but it does vary from geography to geography. Yes sir?

Unidentified Analyst

(Inaudible)

John Morris

Oh! What you got and what you got not.

Unidentified Analyst

(Inaudible)

John Morris

If you look back a couple of years that number is close to 15. So it’s moderated this year and we think we are going to.

Unidentified Analyst

(Inaudible)

John Morris

Yes sir?

Unidentified Analyst

Why do volumes continue to decline just the way the consumer behaves or the world behaves (inaudible) unprofitable business going or what?

John Morris

Well, it’s probably little bit of everything. I think Jim mentioned, we are kind of, yeah...

Unidentified Analyst

(Inaudible)

John Morris

That's okay. We probably run at about 75% to 80% of GDP from a volume standpoint...

Unidentified Analyst

(Inaudible)

John Morris

Okay. Thank you.

Unidentified Analyst

Thank you.

Jim Trevathan

Thank you.

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