Q2 Earnings

Waste Management reported a $400 million revenue hit in Q2, with volumes still lower across multiple lines of business, but took an increasingly optimistic tone in today's earnings call about how the worst economic effects from the pandemic might be over. 

“During these unprecedented times, our business model has once again proven its resilience," said CEO Jim Fish in prepared remarks during the call.

Waste Management and Advanced Disposal Services also announced an amendment to their updated merger agreement this week, with GFL Environmental now agreeing to purchase "the remaining assets anticipated to be required" for U.S. Department of Justice approval. This increases the purchase price to $863.5 million, up from $835 million. 

Pandemic effects

• Overall company volumes were down by 10.3%, while residential volumes have declined from prior peaks but remain above average. Commercial volumes were down by nearly 11%, industrial was down 16% and landfills were down 13% when adjusting for seasonal volumes in 2019. MSW volumes at landfills were said to be more resilient, down 9% for Q2 and 3.5% in June. 
• COO John Morris reported service had resumed for more than half of the commercial and industrial activity affected by the pandemic. Customer cancellations have risen from 1% in Q1 to around 2.6% currently, but Morris described that trend as leveling out. Bankruptcies have not been a widespread trend, though CFO Devina Rankin said expected delays in payment from some customers could create a $80-100 million headwind toward free cash flow contributions for the year.
• Waste Management reported $12 million in operating expenses and $8 million in selling, general and administrative expenses related to its "People First" response to the coronavirus. This includes spending for personal protective equipment, a 40-hour payment guarantee, virus-related absences and remote work arrangements. At the same time, the company reported efficiency savings in multiple categories – including a $45 million reduction in overtime costs.

While 2020's trajectory remains highly unpredictable, Waste Management's executive team repeatedly expressed optimism that the worst economic effects appear to be behind them after volumes bottomed out during spring lockdowns. Sequential improvements have continued across various sectors, with special waste rebounding and commercial waste activity picking up more quickly than expected. Initial results for July "continue to accelerate, albeit at a slightly slower pace,” Fish said. 

Despite COVID-19 cases surging in multiple states this summer, the company's business has not been as heavily affected in areas such as Texas, Georgia and Arizona. In fact, Fish said that with the exception of Florida, those states are among some of the best performers. He described economic activity in the company's headquarters city of Houston as continuing without major effects outside of wider mask usage. Conversely, the areas that are still softer in terms of business activity are among those with some of the lowest case rates.

“Where we’ve seen a little bit of a lag are in those areas that closed pretty quickly and then have stayed closed the longest," said Fish, referencing states in the Northeast and Mid-Atlantic that are starting to rebound economically. “We’re pretty encouraged by what we’re seeing with respect to commercial reopenings, it’s the one that probably stood out to us the most because we were least certain about it.”

Despite this growing optimism, executives repeatedly referenced unknown factors about how economic activity will evolve. Among small business customers that qualify for a previously announced free month of service, not all have reopened. A temporary pause on price increases and extension of payment terms for certain customers will also continue in the near future. Morris noted the fate of educational facilities, a notable part of Waste Management's business, is also "kind of a moving target at this point." Excluding those facilities, the company has actually seen 60% of its lost business recovered versus 50% overall.

“When you look at how we finished June and see July coming together we do think that there’s some potential for optimism in the topline results for the back half of the year, but it’s appropriate for us to be reserved in going too far in terms of how quickly we start to see recovery," said Rankin.

Other developments

• Capital expenditures for Q2 were $436 million, down $142 million year-over-year due to a change in landfill cell construction schedules and a reduction in steel container purchases. Annual capital spending is now projected in the $1.55-1.65 billion range. The company no longer plans to change fleet spending this year, but may alter it next year based on volume trends, Rankin said. 
• Recycling revenues were $275 million for Q2, up year-over-year but down when comparing the first six months against 2019. Morris said a nearly $8 million improvement in operating earnings before interest, taxes, depreciation, and amortization (EBITDA) for recycling "exceeded our expectations," noting the blended commodity value had improved to $57 per ton, and said recycling could be a tailwind into the back half of the year.
• While details were limited, Fish said the company will accelerate plans for "customer service digitalization" technology that will be "unmatched" within the industry by integrating existing fleet technology with customer-facing systems. The positive experience with quickly transitioning to remote work is what "gave us confidence that we can be more ambitious and agile when it comes to technology advances," he said. 

Looking ahead

• Executives reiterated their expectations for more than $100 million worth of synergies from the Advanced acquisition, saying one silver lining of an extended transaction period was the ability to take an even closer look at integration plans. The expected next step in this process is a new Advanced shareholder vote in August, followed by a Q3 closure target.
• The company paid $230 million in dividends during Q2 and is continuing a temporary suspension of share repurchases through the end of the year. It also anticipates deferring $125 million in payroll taxes for 2020 as allowed under the CARES Act.   
• Waste Management now projects annual revenue for 2020 will be down 4-5% and anticipates annual free cash flow "approaching $2 billion" (excluding costs associated with the Advanced acquisition). Negative revenue effects are expected to persist in Q3, and possibly taper into Q4. Fish said he does not expect the business to return to a state of normalcy that would allow for direct comparisons to 2019 until mid-2021 or possibly Q1 of 2022.