Waste Management, Inc.

Good day and thank you for standing by. Welcome to the WM's third quarter 2022 earnings conference call. At this time, all participants 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 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Eggle, Senior Director of Investor Relations. Please go ahead.

Thank you, Catherine. Good morning, everyone, and thank you for joining us for our third quarter 2022 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, Executive Vice President and Chief Financial Officer. We will give prepared comments from each of them today. Jim will cover our 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 earnest press release and is available on our website at www.wm.com. The form 8K, the press release, and the schedules 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. 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 in our files of the FCC, including our most recent Form 10-K. Trouble discussed are results in the areas of yield and volume, which, unless stated otherwise, are more specifically references to internal revenue growth or IRG from yield or volume. During the call, Jim, John, and Davina 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 2021. Net income, ETFs, operating EBITDA and margin, and SG&S spent results have been adjusted to enhance comparability by excluding certain items that management believes do not reflect a fundamental business performance or results of operations. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the Area Specialization Tables, which can be found on the company's website at www.wm.com, 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 at approximately 1 p.m. Eastern time today. To hear a replay of the call, access the WM website at www.investors.wm.com. Time-sensitive information provided during today's call, which is occurring on October 26, 2022, may no longer be added at the time of a replay. Any redistribution, retransmission, or rebroadcast of this call in any form without the express written consent of WM is prohibited. Now, I'll turn the call over to WM's President and CEO, Jim Fish.

Thanks, Ed, and thank you all for joining us. Our team delivered strong results in the third quarter, growing adjusted operating EBITDA by 11% compared to last year. The outperformance is driven by the strength and resiliency of our collection and disposal business. In a quarter where the preponderance of macroeconomic discussion is centered around signs of a slowing economy, WM's collection and disposal operating EBITDA grew by more than 12%, and margins expanded 60 basis points. Collection and disposal or organic revenue growth was 8.8%, elevating quarterly total revenue, company revenue, to above $5 billion for the second consecutive quarter. The growth was delivered The growth we delivered was driven by deliberate steps to grow revenue and efficiently manage costs, which together positioned us to overcome inflationary pressures. Our solid results through the first nine months of the year positioned us well to achieve the updated guidance provided last quarter, even with a recent downturn in recycling commodity prices. An important contributor to our improving trend in operating expenses and overall cost structure is the strategic decision to leverage through automation the tight labor market and high attrition. John will touch on this as he discusses our significantly improved turnover in more detail. By the end of 2022, we will have reached almost 1,000 full-time positions in difficult-to-source job categories that we've chosen not to refill. putting us well on our way to reducing our labor dependency by 5,000 to 7,000 jobs. We're pleased to see early benefits from our investments to reduce our costs to serve, while also differentiating WM by enhancing the customer experience. Continuing on this discussion of our 2023 and beyond strategy, we're very pleased with our investments we're making in both renewable natural gas and recycling businesses. On R&G, we continue to make great progress on building out our new plants, as we expect 2023 to be the heaviest capital investment year. We're on track to see meaningful earnings contributions from 2022 and 2023 investments in 2024, with fully criminal operating EBITDA contributions coming in 2026, which are conservatively estimated at $400 million. Our recycling business not only provides an important service that our customers want and need, it continues to be a profitable business generating solid returns. We worked hard to adjust our business model over the last several years and saw the results of that in the third quarter, particularly in our automated facilities. Our five fully automated MRFs are now delivering differentiated results relative to our single stream network with about 30% lower labor costs, 13% lower total operating costs, nearly double the operating EBITDA margin, and most importantly, a 40% improvement in key safety metrics. We're all trying to complete four automation projects and add one new MRF in 2022. The significant investments that we're making in growing and automating our MRF network are strengthening the business by reducing costs, increasing throughput, and improving product quality. As with our R&G investments, 2023 will be the heaviest year of capital spending in the rebuilding of our symmetry MRS with the biggest increase in incremental earnings coming in 2024-2025 as the majority of the rebuilt and new MRS come online. Additionally, as part of our commitment to growing our recycling business, we announced that we are acquiring a controlling interest in Avangard Innovative's U.S. business. The planned acquisition We'll grow our plastics recycling capabilities by delivering circular solutions for films and clear plastic wrap used commercially. We expect to receive investment returns comparable to our recycling automation investments, yet on a more prolonged horizon given that operations are in the early stages of scaling. We plan to provide a more detailed update during our Ford Current Ranks call once the deal closes. Also on the M&A front, we completed more than $200 million of acquisitions in the third quarter, putting us well on our way to our full year expectation of $300 to $400 million. We closed two nicely sized solid waste tuck-in acquisitions in Indiana and Arizona during the quarter. These acquisitions are a compliment to our existing operations, and we expect to generate solid returns and earnings contribution in 2023. And finally, I'm pleased to share But earlier this month, we released our 2022 sustainability report, providing details on our ESG performance and outlining our new 2030 priorities. These new priorities are strongly linked with our overall company strategy and directly support expansion of our recycling and renewable energy businesses. Even as we celebrate continued progress in our sustainability journey, we're already focused on driving improvements in the future. In closing, I want to thank the entire WMP for their hard work and dedication. We're focused on finishing 2022 strong while continuing to progress our investments in recycling, renewable energy, and automation to drive growth. I'll now turn the call over to John to discuss our operational results for the quarter. Thanks, Jim, and good morning. Exceptional organic revenue growth continued to be a key contributor to our strong results in the third quarter, led by collection and disposal yield of 7.1%. Robust core price across every line of business led to third quarter core price of 8.2%, up 70 basis points from the second quarter. We continue to prioritize customer lifetime value in our pricing strategies, and we maintain third quarter turn of 8.7% when adjusted per steps we took to intentionally shed three large, unprofitable contracts. We remain focused on disciplined pricing in the fourth quarter, positioning us to achieve our full year revenue growth guidance of about 10%. In the third quarter, volume remained at healthy levels as workday adjusted collection and disposal volume grew by 1.7%, including special waste volume growth of nearly 15%. Commercial volume adjusted for the contract loss, as I mentioned, was 1.4%. We continue to grow volumes as our teams focus on differentiating WM as a preferred service provider. In addition, our teams in Florida are rising to the challenges from Hurricane Ian, taking care of their teammates and communities. While there were increased costs from business disruption and property losses in the quarter related to the hurricane, we are well positioned to handle storm volume as cleanup activity and ramp up in the fourth quarter. We remain focused on controlling operating costs. Adjusted operating expenses were 62.2% of revenue in the third quarter in line with prior year. While we still see high single-digit inflation, our operating expenses as a percentage of revenue has always improved 70 basis points compared to last year. Over the last year, we made significant investments in our people, including proactive wage adjustments, an approved benefit package, and increased training. Those investments are paying off as driver turnover improved 410 basis points in the past three months, and sequentially, the rate of increase in labor costs improved more than 400 basis points. We need to repair costs remain elevated and are being impacted by the slowdown in truck deliveries, a tight labor market for technicians, and higher costs for parts and third-party services. The impact of higher fuel costs increased operating expenses as a percentage of revenue by 50 basis points. This increase was completely offset by the alternative fuel tax credits realized in the third quarter related to the first half of 2022. While cost inflation appears to be easing, the inflationary environment only serves to reinforce our commitment to using technology and automation to reduce our labor dependency across the business and lower our cost to serve. As Jim discussed, we continue to have strong conviction in our recycling business. While global markets drive the value of recycled commodities, the steps we've taken over the past few years to shift about 85% of our third-party lines to a fee-for-service model provides protection on the downside. So while there is a level of earning variability, the recycling business is profitable and generates solid returns in any economic environment. Our blended average commodity rate in the third quarter was about $94 per tonne. We are assuming a blended commodity value of about $50 per ton for the fourth quarter of 2022, which compares to $132 in the same quarter of 2021. These recent commodity market moves, combined with persistent cost inflation, are expected to be about a $50 million year-over-year headwind to operating EBITDA in the fourth quarter. We're very focused not only managing costs in the recycling business, but also investing and automation across our MRF network to structurally lower the cost of processed material and achieve better quality, which further enhances the protections afforded by our fee-for-service model while providing profitability lift even in the toughest markets. In the renewable energy business, we continue to see strong performance with operating EBITDA in the first nine months growing $24 million. The second of our 17 new R&G plants announced at the beginning of the year is on track for completion at the end of the year and is expected to begin generating revenue in the third quarter following EPA certification to generate RENs credits. In closing, we are very pleased with our third quarter results and we continue to operate our business with notable focus on disciplined cost control and responsible revenue quality improvements. I want to thank the entire WM team for their invaluable contributions to our success and I'll now turn the call over to Davina to discuss our financial results in further detail.