Waste Management, Inc.

Good day and thank you for standing by. Welcome to the WM Second Quarter 2023 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 this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ed Eagle, Senior Director of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone, and thank you for joining us for our second quarter 2023 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. You will hear prepared comments from each of them today. Jim will cover high-level financials and provide a strategic update. general cover and operating overview, and Davina will cover the details of our 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 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 filings with the SEC, including our most recent form, 10-K. John will discuss the 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 second quarter of 2022. Net income, EPS, operating EBITDA and margin, and operating expense and margin 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. These adjusted measures, in addition to free cash flow, are non-GAAP measures. Please refer to the earnings press release and tables, which can be found on the company's website at www.wm.com. for reconciliation to the most comparable gap measures and additional information about our use of non-gap measures and non-gap projections. This call is being recorded and will be available 24 hours a day, beginning 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 July 26, 2023, may no longer be accurate 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 continues to advance our 2023 priorities, including increasing the profitability of our business through strong price discipline and an optimized cost structure. As I said in February, 2023 will be a year of pricing and cost control. It's a year of continuing to set ourselves up for the long term by delivering on what we can control. In the second quarter, our adjusted operating EBITDA margin expanded 60 basis points, driven by pricing in the collection and disposal business and diligent SG&A cost control. We delivered this result despite some things that we can't control, stubborn cost inflation, slower event-driven volumes, and lower than expected renewable energy prices. Notably, Cleanup volumes from Hurricane Ian came in significantly lower than anticipated, which had a $9 million operating EBITDA impact in the quarter. We're pleased with our pricing results. For the first half of the years, our team is executing well to ensure that our pricing is keeping pace with the pressure from rising costs. Overall, our volumes are also tracking at or above our expectations, though the mix of volumes across our businesses is different than we had planned. Event-driven landfill and industrial volumes in the quarter were lower than we anticipated, which we see as a short-term moderation in this business. Some customers seem to be taking a more cautious wait-and-see approach regarding the timing of large jobs given the economic backdrop, with many anticipated projects moving into 2024. Our pipeline remains strong, so we view this as a temporary shift in project timing. The impact to our special waste and construction and demolition volumes has been mitigated by strong growth in our strategic accounts business, where we continue to differentiate our service offering. We're overcoming margin pressure from this temporary change in volume mix with continued momentum in pricing, optimization of costs, and efficiency improvements. And you'll hear more from John and Davina about the success we're having in managing our operating costs and SG&A, where we have opportunities ahead. Turning to recycling. We're now expecting a slower-than-plan recovery in recycled commodity prices in the second half outlook. The investments we're making in automating our recycling facilities position us well in any commodity market environment as they drive lower labor costs, processing costs, improved efficiency, and enhanced material quality. In the second quarter, our fully automated recycling facilities delivered differentiated results relative to the rest of the network, with 33 percent lower labor costs per ton and 18 percent lower total operating costs per ton. During the quarter, we're pleased to have opened a new recycle facility in the Greater Toronto Area and also completed technology and automation upgrades at an existing facility in Arizona. Recycling is a service with strong customer demand, and our intentional shift to a fee-for-service business model, as well as our high-return technology investments, make it a profitable business for WM in any economic environment, with margins now well above our prior commodity cycle lows. On the renewable energy front, we opened our EcoVista Renewable Natural Gas Facility in Arkansas during the quarter, the sixth WM-owned R&G facility and the second of our 20 planned projects in our sustainability growth program. Last month, the EPA announced its three-year renewable fuel standard rule, which provides strong demand and visibility to the market for renewable fuel standard credits, or RENs. This robust demand provides support for our blended average pricing assumption of $26 per MMBTU used to develop our investment strategy and strengthens the case for potential upside. Shifting to our full-year outlook, we're updating our 2023 guidance ranges to consider first-half results and a slower recovery in commodity prices in the second half of the year. We now expect an adjusted operating EBITDA growth of 5.7% at the midpoint of our guidance range, which is still well within the 5% to 7% long-term growth range that we provided in May of 2019. Davina will walk through the key pieces of the outlook in further detail. The WM team continues to step up to the challenges of each day, while at the same time, progressing investments in our business that positions us to further differentiate our industry-leading asset network and capabilities and reduce our cost structure. I want to thank each of our team members for their hard work and dedication. I'll now turn the call over to John to discuss our operational results for the quarter. Thanks, Jim, and good morning. Pricing remained a bright spot in the second quarter as we continue to execute on our revenue management programs to recover cost increases and improve margins. Our second quarter organic revenue growth in the collection and disposal business was 6%. This growth was led by core price of 6.9% with collection and disposal yield of 5.8%. We have and continue to emphasize the importance of post-collection pricing, and in Q2, we delivered yield of 7.5% at our transfer stations and 6% for landfill MSW. both improvements in the growth rates from last year. Our team's collective focus continues to be on maximizing customer lifetime value. That focus led to second quarter churn improving to 8.3%. This lower churn has allowed us to convert more core price into yield, driving our full year outlook for collection and disposal yield to increase to more than 5.5%. Looking at volumes, second quarter collection and disposal volume grew by 0.2%. As expected, volume growth was weighted to the landfill line of business with modest declines in the collection business. MSW volumes stood out with an increase of almost 4%. As Jim mentioned, some of our event-driven landfill volumes, particularly special waste tons, have been tracking below our expectations and below the very strong levels we saw in 2022. Our collection volumes were down modestly in the quarter due to the intentional steps we continue to take to price every contract to achieve acceptable returns as well as the impact of lower volumes from temporary roll-off. Net new business and net service increases were firmly positive and improved from first quarter 2023 levels, underscoring that commercial conditions remain solid. Though collection volumes are down, both revenue and operating EBITDA grew in each line of business, demonstrating that we are prioritizing profitable volume growth. For full year, we continue to expect collection and disposal volumes to be flat at the midpoint of our guidance. Turning to operating expenses, we realized benefits from our optimization efforts in the second quarter, leading to 20 basis points of improvement in operating expenses as a percentage of revenue to 62.2%. The improvements that we made in Q2 are being partially offset by higher costs due to inflation. While we experienced some impact of lingering inflation into Q2, signs of easing continued as the quarter progressed. The areas experienced the most pressure are labor costs and repair maintenance costs, There's cause for optimism in both of these categories. Labor costs have continued to moderate during the second quarter, settling in the mid single digit range from the double digit levels that we have seen over the last year. This improvement can be attributed to better employee retention as evidenced by over 50% fewer driver openings and driver turnover improving 250 basis points compared to the same period in 2022. We have robust strategies in place to optimize labor efficiency, particularly in our collection line of business, which we expect to further diminish these cost pressures as the year progresses. We are seeing the benefits of these efforts as we progress through the second quarter, with June marking the lowest cost to serve month of the quarter. This is a promising sign as we move through the remainder of the year. As noted, another significant factor impacting our operating costs has been repair and maintenance expenses. The effects of not receiving a full allotment of trucks over the last few years are still being felt, however, The good news is we are now receiving more trucks, and it's leading to improved costs. Since the beginning of the year, our maintenance costs per unit have either improved or remained stable across all collection lines of business. Similar to our approach to labor costs, we have comprehensive plans in place to drive continued improvement in our repair and maintenance performance as we progress through the rest of 2023. Our efforts in these two key areas, as well as broader operating expense categories, give us confidence that we can continue to improve overall operating costs as a percentage of revenue as we progress through 2023. I want to thank the entire WM team for continuing to provide safe and reliable service to our customers. I know they're all working hard to deliver strong results through the remainder of this year and beyond. With that, I'll turn the call over to Davina to discuss her financial results and guidance in further detail.