Can Waste Management's hot streak survive an economic downturn?
The company says yes, and has plenty of reasons why. It's also buying more new trucks this year than ever before, seeing labor retention improve and eyeing some "very attractive" acquisitions.
|Adjusted Net Income||$496M|
Waste Management's executives were glad to be broken records (their words) about what they view as the company's historically good position in yet another quarter where just about everything went their way.
"The solid waste market for the industry and specifically for Waste Management — and I say specifically for us because we have the $70 million [cash bonus payment] that nobody else has in our cost structure — is incredibly good. It's making up for all of this other stuff that's touching us," said CEO Jim Fish during the company's third quarter earnings call. "Solid waste is overcoming all of it."
- The company's collection and disposal business contributed $200 million in incremental revenue. Core price was 2.9% and landfill volumes were up by 5.1%, driven in part by a C&D uptick.
- Business was still tough on the recycling side, with revenue down $52 million YoY. Given that contracts are being reworked to raise rates and include contamination charges, and the fact that comparisons will start getting more favorable, Fish projected "recycling is going to be a tailwind for us" in the $40 million to 50 million range for 2019.
- Asked about a potential decline in the housing market, Fish said annual revenue exposure is around $100 million to $150 million per year. While he still felt confident about housing trends for the near future, Fish said this is a smaller exposure than when the recession hit 10 years ago.
It seemed the company's leadership couldn't find enough ways to say how well they think things are going during this latest call, with far less focus on recycling than in recent quarters. Analysts largely agreed with the sentiment, though there were some questions about whether the company's growth trend of 2% yield and 2% volume could hold up in 2019, given ongoing costs in multiple areas.
There were also questions hinting at what a potential economic downturn could do to business. While it wasn't referenced directly, the recent prediction by JPMorgan Chase that the next financial collapse could come as soon as 2020 is the latest sign this boom may not last forever.
Given how hard the industry was hit the last time around, all are wary of a repeat experience. Fish outlined multiple reasons why he's still optimistic about the economy during an appearance on CNBC this morning, as well as during the call.
"When we look at the bull case, and we look at the impact of tax reform that is still being felt, we look at reduced government regulation beginning to positively impact the special waste market, we look at the construction business continuing to grow, cranes in just about every city ... all of that is kind of a bullish case that would tell you that volumes have more upside than downside in this type of economy."
If the economy does turn from what may be its current peak, CFO Devina Rankin said the company's balance sheet "is in the best shape that it's been not just in the decade, but really probably in our history." With that in mind, she said Waste Management could potentially even ramp up larger strategic M&A decisions after such an event. "We like the fact that we're as well-positioned today as we are to be able to act in a different economic environment should opportunities present themselves."
Labor & CapEx
- Waste Management expects to spend $135 million on employee compensation benefits this year. According to Fish, that includes planned $2,000 bonuses set to be paid out in December, market-driven wage adjustments, and an absorption of healthcare cost increases. He also reported that turnover metrics improved in the third quarter, without offering specifics.
- Capital expenditures were $404 million for the quarter, up $54 million YoY. Fish said the company "bought more trucks this year than at any year in our history," largely transitioning to natural gas and automated vehicles, which he expects will decrease maintenance costs.
- Fish also previewed plans for new routing software that is expected to help with labor and maintenance costs in 2019. "We've gotten really good at managing the ends of the route being pre-trip and post-trip. The middle of the route is an area where we think we still have a real opportunity."
Following this year's tax cut, all of the industry's largest companies have been getting creative with their approaches to addressing a tight labor market. Last quarter, the company announced its first automated bulldozer pilot at a closed landfill site in Colorado. Planned bonuses for an estimated 34,000 frontline employees will also be a telling data point for turnover rates heading into 2019.
On the fleet side, Waste Management reported a 4.5% increase in maintenance costs this quarter; newer vehicles are expected to help bring that down in 2019. As more cities raise their expectations for vehicle age and fuel requirements, this will also have the added benefit of making the company more competitive for future bids.
- Following the retirement of COO Jim Trevathan and Senior Vice President of Northern Tier Operations Jeff Harris, plus the elevation of John Morris to COO from the Southern Tier SVP position, new titles were also announced. Tara Hemmer will now lead the Southern Tier and Steve Batchelor will lead the Northern Tier. Mike Watson has also been named chief customer officer.
- The company paid about $200 million in dividends and bought back $200 million worth of shares during the quarter, bringing its annual totals to $605 million and $750 million respectively. CFO Devina Rankin said she expects to see "another healthy increase in the 2019 dividend," potentially around the 9.5% range.
- Waste Management spent $79 million on tuck-ins during the quarter, bringing its year-to-date spend for 21 companies up to $350 million. This accounted for about $215 million in acquired revenue. While Fish feels some companies still have "elevated expectations" of their value, he also said there are plenty out there "that are very attractive to us."
- Waste Management Third Quarter 2018 Results
- Seeking Alpha Earnings Call Transcript
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