Waste Management Inc., Houston, announced financial results for the first quarter on May 6. Revenues for the first quarter were $3.73 billion compared with $3.7 billion for the same 2019 period. Net income for the quarter was $361 million, or 85 cents per diluted share, compared with $347 million, or 81 cents per diluted share, for the first quarter of 2019. On an adjusted basis, net income was $395 million, or 93 cents per diluted share, in the first quarter, compared with $402 million, or 94 cents per diluted share, in the first quarter of 2019.
Waste Management’s adjusted first quarter results exclude a 5 cent per diluted share negative impact from advisory costs incurred in connection with the pending acquisition of Advanced Disposal Services Inc., 2 cent per diluted share primarily from the non-cash impairment of an unconsolidated investment, and 1 cent per diluted share from costs incurred to support its plan to implement a new enterprise resource planning system.
Key highlights for the first quarter
Financial results for the first quarter were in line with the company’s expectations, it says.
- In the first quarter, revenue growth was driven by yield and volume growth in the company’s collection and disposal business, which contributed $74 million of incremental revenue.
- Core price for the first quarter of 2020 was 5.5 percent.
- Total company operating EBITDA was $975 million for the first quarter. On an adjusted basis, total company operating EBITDA was $1.01 billion for the first quarter.
- In spite of a 30 percent decline in recycled commodity prices, the company grew operating EBITDA for its recycling business by almost $3 million when compared to the first quarter of 2019 by reducing costs and improving its fee-for-service model.
- In the first quarter, net cash provided by operating activities was $765 million and free cash flow was $318 million.
- The company paid $236 million of dividends to shareholders and repurchased $402 million of its shares in the first quarter.
“Through this unprecedented pandemic, we have managed the impact of the shutdown on our own people, our customers and our business extremely well,” Fish says. “We are now turning our focus to managing equally well through the coming restart and to using this as an opportunity to further differentiate ourselves through permanent enhancements in our business processes and our service offering to our customers. The strength and resiliency of both our people and our business model gives us confidence that we can continue to deliver on our commitments to our customers and our shareholders.”
As COVID-19 disruptions escalated in the United States and Canada during March, Waste Management took steps to protect its workforce and continue to provide reliable service to its customers.
“I am extremely proud of how our team has worked together to proactively address the challenges we’ve faced as a result of the coronavirus pandemic,” Jim Fish, president and CEO of Waste Management, says. “Our top priority as a leadership team has been the health, safety and financial wellbeing of our 45,000 team members. In turn, our team members have continued to provide essential services to customers and communities across North America.
“As a leader in the industry, we also have a responsibility to work with our customers as they defend the health of their businesses. This is particularly true for small businesses, the lifeblood of our economy.”
Waste Management says it has responded to the COVID-19 pandemic by:
- Protecting frontline employees by supplementing customary practices and daily operational routines with social distancing and personal protective equipment enhancements.
- Promoting the health and financial wellbeing of its employees by excusing COVID-19-related absences and providing a guarantee of 40 hours of weekly pay to all full-time employees during the pandemic.
- Leveraging technology to quickly transition approximately 20,000 back office employees to work from home—enabling these team members to serve customers and support frontline employees remotely.
- Partnering with its customers to adjust service levels and extend payment terms.
- Working with municipalities to address increased residential volumes and recycling challenges in areas where there have been processing disruptions.
The company noted it had the following COVID-19-related business impacts in the first quarter, beginning in March:
- A reduction in landfill and industrial collection volumes. While volume-driven revenue in the commercial collection business held up relatively well in March, service decreases accelerated late in the month and into the second quarter.
- An increase in container weights in the residential line of business, which increased the company’s cost to service these customers.
- A negative revenue impact of approximately $40 million.
- A $6 million increase in selling, general and administrative (SG&A) expenses driven by technology costs incurred to accelerate work-from-home capabilities.
- A decline in operating EBITDA margin of approximately 40 basis points, which the company attributes to volume declines in its higher-margin lines of business and cost pressures in the residential line of business. In its higher-margin lines of business, the company effectively flexed operating costs with volume changes, particularly labor and fleet costs, mitigating margin pressure.
Balance sheet and cash flow considerations
- The company continues to maintain a strong balance sheet and liquidity position, it says, with its current and forecasted leverage ratio well within its revolving credit facility financial covenant and more than $3 billion of available capacity under that credit facility.
- The company expects to generate strong free cash flow and remains committed to its dividend program, it says.
- As a prudent step to preserve cash in this uncertain environment, the company has temporarily suspended share repurchases for the foreseeable future.
Update on 2020 outlook
Waste Management says it is suspending its 2020 financial guidance due to the unprecedented impact of, and uncertainty created by, the COVID-19 pandemic.
“Our business model generates strong cash flow and is resilient in any economic cycle. In past downturns, we have demonstrated the ability to flex spending and manage capital expenditures to generate strong free cash flow and return excess cash to our shareholders. We expect to deliver on these priorities as we continue to provide essential services to our customers during this unprecedented pandemic,” Fish says. “At this time, we cannot forecast with reasonable accuracy the duration of the coronavirus disruptions, particularly for small businesses, or the pace of an eventual recovery. We expect to resume providing financial guidance when we have greater clarity.”
The company says it anticipates a significant decrease in 2020 revenue from planned levels as a result of COVID-19, driven by volume declines in its landfill and industrial and commercial collection businesses.
To partially offset the impact of this significant revenue decline, the company is taking the following steps to manage costs and capital spending without compromising long-term strategic priorities or growth opportunities:
- Leveraging technology to enable swift route optimization,
- Dramatically reducing overtime hours,
- Limiting hiring and optimizing the existing workforce through improved retention and reduced turnover,
- Reducing or eliminating certain non-essential costs and expenses like travel and entertainment and consulting costs,
- Reducing incentive compensation accruals, and
- Flexing capital expenditures to a level that is consistent with volume changes.
Earnings call highlights
Waste Management held its Q1 earnings call May 6. During the call, Fish and Waste Management EVP and COO John Morris talked on how the company is managing through the pandemic, dealing with volume fluctuations and protecting worker jobs.
Fish on how the company is supporting customers during the pandemic:
“In an effort to support … small businesses, Waste Management is giving a free month of service to qualifying open-market small-business customers as they resume their normal waste service and restart their businesses in a post-COVID-19 economy. Our customer teams are proactively contacting these small-business customers in an effort to show our support, and will continue to do so as states and provinces reopen across North America. We see this as the right thing to do and believe it will result in greater customer loyalty over the long term. We're optimistic that this enhanced customer loyalty, combined with the fact that we've seen less than 1 percent service cancellations in our commercial line of business since the start of the pandemic, are good signs for how our business will recover as businesses reopen and need our services.”
Fish on where the Advanced Disposal acquisition stands:
“It's been about one year since we announced our acquisition of Advanced Disposal. Despite the general business disruption caused by COVID-19, we continue to make progress and currently anticipate being in a position to receive final antitrust regulatory approval and proceed towards closing by the end of the second quarter of 2020. We're looking forward to completing this transaction, integrating the ADS team and operations and creating long-term value for our shareholders.”
Morris on changes in volume the company is seeing:
“At the peak, we saw more than 20 percent declines in third-party landfill tons and industrial hauls and close to 16 percent declines in the commercial line of business, while our residential line of business has seen about a 25 percent increase in the amount of waste disposed. A large portion of our landfill business over the last several years has been driven by big businesses, C&D contractors and special waste volumes, and they account for much of the decline that we've seen. We expect that these volumes should rebound fairly quickly as the economy reopens and as our pipelines remain strong.”
Morris on the company’s recycling business:
“Our recycling business performed well, considering further erosion in recycled commodity prices in the first quarter. Our average commodity price fell nearly 30 percent to $40 per ton. Despite a decline in revenue of about $60 million in the first quarter, the operating EBITDA contribution from the business increased modestly. These results demonstrate the success we continue to have in restructuring our recycling business to a fee-for-service model. Throughout the COVID crisis, we've been able to continue to safely process most recyclables as we encourage everyone to continue to recycle right.
“As a result of the demand created for materials we collect, we have seen an increase in OCC prices in April. While we are encouraged by the increase in demand and recovered prices, there are some challenges with other commodities like steel, aluminum and plastics as we've seen the prices for these commodities decline. Despite all these movements and restrictions in the marketplace, our team continues to be able to consistently move all the tons we process.”
Fish on the reception of the company dramatically reducing driver overtime to protect jobs:
“The interesting thing—particularly about hourly labor and overtime—is that we went through a fairly quick but thoughtful approach to the 40-hour backstop that we provided. And I think initially, there was some concern that, ‘Oh, my gosh, what are you doing there?’ But interestingly, there's been a pretty minimal cost of that backstop. Recognize what that is, it really is protecting their job, not protecting their paycheck where it was pre-COVID. … In some cases, drivers are saying, ‘You know what, I actually would rather work 44 hours a week as opposed to 53 hours a week.’ So, it has been interesting. … We decided that we would provide a backstop [in terms of hours worked] so it protects their jobs. It doesn't protect their pay. And it has been incredibly well-received. … We’ve had some people that have sent notes to me that honestly, it felt like they were crying through their email. They were so happy that they at least knew that [they had their] job protected.”
Morris on how the company is looking at residential collections and container weights:
“[Residential was] a focal area for me pre-pandemic. And obviously, we've got additional work to do now that we've referenced [regarding] some of these [elevated] container weights. And listen, we're seven weeks into this, so … we're trying to see, as I mentioned earlier, where the bottom is or where the peak is on disposal volumes. And we're starting to see some signs that's going to mitigate. The real question is, how much is it going to be up permanently and how do we amend our strategy?
“What I can tell you is before this pandemic hit, we dedicated resources around the organization that are focused on residential. What we've done is we've obviously added another chapter to their book here [and we might have to] have some difficult conversations with some municipalities."