Q1 Earnings

Waste Management recorded solid results for Q1 – despite a $40 million revenue hit due to initial COVID-19 effects in March – though executives are no longer offering any guidance on how the rest of 2020 may play out.

Like the industry's other major players, Waste Management is not seen as facing any existential risks itself as a result of the pandemic shutdown. During the company's earnings call, CFO Devina Rankin said liquidity is "the strongest it has been in the company's history." That doesn't mean effects won't be significant for Q2 and beyond, as previewed by stark trends from recent weeks.

“We just don’t have as good of an idea about what happens with commercial business, what happens with retail, restaurants, all the sporting-related businesses, office space. That is really virtually impossible to predict," said CEO Jim Fish.

The big unknown

• Waste Management reported a 20% decline in third-party landfill volumes and a 16% decline in commercial volumes during April. While executives said declines have largely bottomed out or plateaued in recent weeks, even beginning to turn slightly positive in some areas, it was too soon to indicate any trends. COO John Morris reported ongoing operational changes as a result, with 6% of routed collection vehicles currently parked.
• Conversely, the company has seen a 25% increase in the amount of residential waste being disposed. About 75% of this business is under a contract or franchise agreement, but Morris described revisiting terms as a "key focal area." Ongoing efforts to improve residential profitability are now viewed as additionally important as more people may be working from home permanently.
• Looking at possible areas for a rebound, Fish pointed to optimism around roll-off collection and landfill volumes. “The good news is that we do have a big landfill business that is largely driven by two groups," he said, mentioning residential waste from various sources as well as special waste or C&D from larger customers that may be less affected. "[Landfills] will emerge from this more quickly than other lines of business for us and other industries.”

Like its other large competitors, Waste Management reports it has worked to adapt quickly to this major economic disruption and remains resilient. Guidance suspensions are expected across the board, though one analyst noted competitor Republic Services (which is still aiming for $1 billion in free cash flow this year) struck a slightly more optimistic tone in its own earnings call yesterday.

While declining to comment on Republic's business directly, Fish and others repeatedly came back to a similar refrain about heightened unpredictability in the months ahead. Even in areas that have theoretically begun to reopen, such as the company's home city of Houston, it remains unclear how and when customers may return to any version of normal. This was described as a primary factor in the decision to suspend guidance.

"If you look at office, retail, the restaurants and the education bucket that was about 65-70% of where we've seen the degradation in revenue and volume," said Morris.

Overall, under 10% of Waste Management's 1.3 million commercial customers have reduced or suspended service as a result of COVID-19 disruptions. The company's decision to temporarily pause price increases, and offer one month of free service to certain smaller customers, is viewed as a way to maintain loyalty if they ramp back up. So far, only around 1% of all commercial customers have canceled service due to the pandemic.

At the same time, the company is anticipating potentially higher levels of "bad debt" among customers that might not be able to pay, increasing reserves for uncollectible accounts by $5 million as a precaution, and recognizes some small businesses that attempt to reopen may not make it.

“That’s the big unknown," said Fish. "The piece that I think all waste companies are going to really have to get our heads around is what happens to small business.”

Fish went on to cite a recent report that said if current conditions continue for six months there could be many more small business closures ahead. 

"That's going to affect us, that's going to affect Republic, that's going to affect everybody in every industry," he said.

Additional updates

• Waste Management has seen an approximately 60% reduction in overtime spending since the situation began and reports some drivers may actually prefer working fewer hours since they have the company's 40-hour guarantee as a backstop. Executives said the cost for this guarantee had been minimal to date and touted it as a way to react more quickly when volumes do return.
• Rankin said the company expects to see "a significant decline" in capital expenditures for Q2 and is targeting a 10% reduction in full-year spending. A notable portion of this will be around landfill cell construction, due to volume declines, as well as equipment purchases.
• Waste Management's Q1 recycling commodity revenues were down by $59 million year-over-year, driven by a nearly 30% decline in commodity values. Still, the company reported a $3 million improvement in EBITDA in this area and said all processed tonnage continues to move.

Looking ahead

• Fish outlined three top priority projects for the senior leadership team going forward. These include establishing protocols for a long-term, work-from-home solution for certain positions, continuing with plans to implement a new enterprise resource planning system, and finding ways to digitize self-service tools for customers in an expedited way.
• During Q1, Waste Management paid $236 million in dividends to shareholders and repurchased $402 million worth of shares. Dividend payments are expected to continue, but the company paused share repurchases in late March "for the foreseeable future."
• Fish said the company anticipates "being in a position to close" the acquisition of Advanced Disposal Services by the end of Q2 and said the originally projected 12-15 month timeline remained on track, despite some delay based on prior expectations. He cited some additional time, due to attorneys for Waste Management and the U.S. Department of Justice shifting to remote work, and noted that ​"we did not contemplate when we closed this deal any type of major economic disruption" back when it was announced in April 2019.