Waste Management, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2019 earnings release conference call. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Speaker Ed Eggo, Senior Director of Investor Relations. Please go ahead, sir.

Thank you, Nora. Good morning, everyone, and thank you for joining us for our third quarter 2019 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 Davina Rankin, Senior Vice President and Chief Financial Officer. You will 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 Davina will cover the details of the financials. Before we get started, please note that we have filed a Form 8K this morning that includes the earnings press release and is available on our website at www.wm.com. The Form 8K, the press release, and the schedule for 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. Such 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 in our files of the SEC, including our most recent Form 10-K and subsequent Form 10-Qs. Jim and 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 IRG, from yields over volume. All third quarter volume results discussed are on a workday adjusted basis. During the call, Jim and Davina will discuss our earnings per diluted share, which they may refer to as EPS or earnings per share, and they will also address operating EBITDA, which is income from operations before depreciation and amortization. Jim and Davina will also be discussing the planned acquisition of advanced disposal services, which they may refer to as advanced or ADS. Any comparisons, unless otherwise stated, will be with the third quarter of 2018. Net income, EPS, operating EBITDA, and SG&A expense, results have been adjusted and projected 2019 measures are anticipated to be 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 the pending acquisition of ADS and our related reduction of common stock repurchases from planned levels. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release tables, which can be found on the company's website at www.wm.com, for reconciliation to the most comparable gap measure and additional information about use of non-gap measures and non-gap projections. This call is being recorded and will be available 24 hours a day, beginning at approximately 1 p.m. Eastern time today until 5 p.m. Eastern time on November 6th. To hear a replay of the call over the Internet, access the Waste Management website at www.wm.com. To hear a telephonic replay of the call, file 855-859-2056 and enter reservation code 2572365. Time sensitive information provided during today's call, which is occurring on October 23, 2019, may no longer be accurate at the time of a replay. Any redistribution, retransmission, or re-broadcast of this call in any form without the express written consent of Waste Management is prohibited. Now I'll turn the call over to Waste Management's President and CEO, Jim Fish.

Thanks, Ed, and thank you for joining us. In the third quarter, the fundamental strength of our collection and disposal business continued to drive positive results for the company, confirming that focusing on our employees and customers and leveraging our asset network is the right strategy. In the third quarter, we generated more than 5% organic revenue in our collection and disposal business with yield of 2.6% and volume of 2.7%. And we had a strong core price of 5.3%, which translated into total company operating EBITDA of more than $1.14 billion, an increase of more than 3% from the third quarter of 2018. We also saw operating EBITDA margin expand 50 basis points in the collection and disposal business, which translated into operating cash growing almost 9%. As we reflect on the year so far and develop our plans for next year, a couple of trends are starting to come to light, particularly in our collection and disposal business. Our results across the solid waste business have been strong through the first nine months of the year, but they've been particularly strong in our lines of business that are driven by the consumer portion of the economy, commercial collection, and MSW landfill volumes. We have good visibility into these segments of our business, and all indicators are pointing to continued strength. When we look at the portion of our business driven by the industrial segment of the economy, namely special waste, we continue to see growth. However, the pace of growth is starting to moderate. We're starting to see generators take a more cautious approach to awarding new work. We still see our special waste pipeline is strong, And we're in a solid position to capitalize on these jobs as they occur based on the long-term relationships we build with our large industrial customers and the strength of our asset network. Overall, our collection and disposal business has performed exceptionally well in 2019, overcoming headwinds in our commodity-sensitive businesses, recycling and renewable energy. The results in our commodity-sensitive businesses, which make up less than 10% of our total revenue, have been below our expectations. We've discussed all year the historically low recycling commodity prices, but we've also seen a negative $18 million impact in our operating EBITDA plan through the first nine months of the year related to renewable natural gas credits. We remain convinced that our strategy to close the loop between our landfill gas and CNG fleet is the right strategy and is an important piece of our commitment to drive sustainability within our operations. The good news is that the steps we're taking to transform the recycling business with restructured fee-based contracts and investments in technology will insulate the business from commodity price swings, and we're starting to see results. We saw a 320 basis point improvement in contamination rates at our single stream MRFs in the third quarter. On the technology front, we began running test material through our MRF of the future and are encouraged by the results. At multiple other facilities, we're testing robotics, advanced optical sorting technology, and improving screening processes. We continue to expect meaningful operating cost savings from these advancements in technology while also creating the best quality material for sale through positive sorting processes. Finally, I'd like to provide an update on the progress we're making towards the ADS acquisition. As we mentioned last quarter, we continue to make progress towards closing this transaction and we remain on track to complete the acquisition during the first quarter of 2020. As you might imagine, we've received a high level of interest from other companies inquiring any potential businesses we might be required to divest. Our integration team continues to position us to successfully integrate ADS upon close. Overall, we're pleased with our performance in the first three quarters of the year, which positions us to achieve our full year goals. The general macro economy seems to be stable, as indicated by our strong price and volume growth with consumer spending steady while the industrial segment seems to be taking more of a wait and see approach. The overall investment theme for waste management remains one where our solid waste business continues to produce excellent results and overcomes challenges in our commodity-based businesses. This is best demonstrated by our 7.8% year-over-year operating EBITDA growth in our collection and disposal business and our 8.9% year-over-year growth in our net cash from operations. These strong results position us to deliver our full year 2019 results. In closing, I want to highlight another accomplishment in the quarter that we're particularly proud of. For the second year in a row, we were named Sector Leader for Commercial Services on the North American and World Dow Jones Sustainability Indices. This distinction is a reflection of our leadership and sustainability and the continued strides we are making in these areas. And with that, I will turn the call over to John. Thanks, Jim, and good morning. We're pleased with our third quarter performance driven by organic revenue growth of 5.3% in the collection and disposal business. The headline here is that landfill MSW yield in the third quarter was 3.7%, a 250 basis point improvement over last year. And if you look at the monthly trend of MSW yield, the highest month in the quarter was September, indicating continued momentum in this area. This has been a focus area for us, and we've made good progress in 2019 with year-to-date MSW yield of 3.6% compared to 2.2% for the full year 2018. This step change increase in pricing helps to overcome rising operating costs and generate appropriate returns on our high-quality, capital-intensive post-collection assets. We saw commercial volume growth of 3.2% for the quarter and continued MSW volume growth of 1.9%. We also continue to see service increases, outpaced service decreases in the third quarter, and net new business remain positive, all evidence of a healthy consumer economy. We've heard from some of our industrial customers that they lack visibility to commit to some event work. However, special waste volume growth of 4% in the third quarter is still healthy growth, especially given the tough comparisons from last year. C&D volume growth of 13.6% was largely driven by fire cleanup activities in California, which wrapped up in August. Looking at the recycling business, our blended average commodity price in the third quarter was just under $40 per ton, a decline of 40% compared to last year, and a further 8% decline from the 10-year low reached in the second quarter, which led to an $86 million decline in our recycling revenue. Despite this precipitous drop, steps were taken to improve the recycling business, held year-over-year decline to operating EBITDA at $7 million and EPS decline to about one penny. In past years, an $86 million decline in revenue would have represented about an 8 to 10 cent decline in EPS. Mitigating this larger impact demonstrates the success we're having in restructuring contracts and assessing fees for contamination. Given our outlook for continued depressed prices in the fourth quarter, we continue to expect that full-year results for recycling will be a $0.01 to $0.02 EPS headwind in 2019 compared to 2018. Turning to operating expenses, in the third quarter, total operating costs as a percentage of revenue were 61.5%, a 50 basis point improvement over last year's adjusted results, as our operations continue to improve their efficiency and manage their spending as volumes increase. We're pleased with the improvements that we're seeing in operating costs, particularly with the strong volume growth that we're experiencing. We've been able to manage our labor costs through improved efficiency, and in areas where we have implemented our maintenance service delivery optimization program, metrics are improving. While we are seeing increases in the cost to serve our customers, we are focused both on managing these costs and recovering increases through pricing opportunities. Through the first nine months of the year, our operations have performed well, and we expect that they will continue that momentum through the rest of the year and into 2020. I'll now turn the call over to Davina to discuss our third quarter financial results in more detail.