Waste Management Inc

NYSE:WM

Earnings Call Transcript 2022-Q3

[Tyler Brown, Raymond James]

Okay. Let's go ahead and get started with the next presentation. So for those of you that may not know me, I'm Tyler Brown. I'm the Senior Analyst here at Ray J. I cover both the environmental services sector as well as the transportation sector. So this morning, still morning, I'm really excited to have WM joining us, presenting today is the company's CEO, Jim Fish; and the company's Chief Digital Officer, Nikolaj Sjoqvist. Pretty good. So I want you guys to all take a moment and notice I called them WM or Waste Management. That was a bit by design. This is something that we're going to talk about here in a minute, but there was a little bit of a name change and really it's more WM as opposed to Waste Management going forward. So I think we all know Waste Management. Many of us may even get picked up on Tuesday by Waste Management. The largest solid waste company in North America has a great disposal network, probably the strongest in the industry. I don't think we have any slides, but I do want to Jim, just maybe set the stage, talk a little bit about WM and really what you do, who you are. And then we'll kind of jump into an interactive Q&A, if anybody has any questions, obviously raise your hands throughout the Q&A, but I'll turn it over to Jim and then we'll kind of dive in.

[Jim Fish, Chief Executive Officer]

Okay. Thanks, Tyler. Good morning. I guess just to give you, for those of you who don't have as much familiarity with the company, we are the biggest solid waste company in North America. We're the biggest trash and recycling company in North America. And we will always be that the transition to WM, which I know we'll talk a bit more about is really kind of a reflection of the change to focus on our efforts around sustainability. It was interesting a couple years ago, I was at a National Geographic Conference and was asked. So why do you consider yourself sustainable when you're the biggest landfill company in North America? And my response was, well, we're also the biggest recycler in North America, by the way, how much waste do you think of the 110 million tons a year that we take into our landfills? How much do you think WM generates? An answer is really zero. It's all of us, it's businesses. It's all we do is take it and do something productive with it. And so part of the transition to WM was that it's a reflection of this sustainability move for us that we think is a huge differentiator for us. We already have the network, the assets, where we can talk a bit Tyler about the investments we're making in recycling. But I'm excited to be here. It's been three years since I've been here, I guess, well, maybe four years, it's 2019. So three years since I've been here, but I'm excited about it. And I'm excited about I've said recently, I'm very bullish on this company and obviously I'm biased, but I'm also very bullish on it for a lot of reasons that I think others are bullish on it, which we can talk through.

[Tyler Brown, Raymond James]

Well, let's maybe just start again a little bit with the name change at a deeper level. And again, kind of maybe just give a little bit more context about, again, you move from Waste Management to WM. I'm assuming you're trying to signal to the marketplace, to the Street to whoever that there's kind of a change in kind of – maybe call your go-to-market strategy or what you really want to be known for. So maybe you could talk about that just a little bit.

[Jim Fish, Chief Executive Officer]

And really it's a branding change. It's not – we didn't change the incorporated name. I mean, at the top of the 10-K it'll still say Waste Management. So it's really a branding change. It's not that dissimilar from what I see on your screen here, UPS, I mean, they change their name from United Parcel Service, obviously. IBM, there's a lot of companies that have done this and for various reasons for ours, it made at our sustainability forum that's linked to our golf tournament a couple years ago. Someone asked, so why do you have waste in your name if you want to talk about sustainability, if you want to be synonymous with sustainability. And it was a good question. And I think that the golf term has actually helped promote the brand to a point where we're able to make the change. Not everybody can make a change like that. I mean, you have to have a brand that can not to use the term sustain, but can sustain that change. And I think that the other thing is that we tended to get confused at times I got a call yesterday from a customer who said, you guys, this guy is a Senior VP with a company out on the West Coast, you guys have fallen down on the job. And so I said, look, sorry about that. Let me connect you with the Area Vice President. Well, it turns out it was another waste company that just had waste in their name and so part of that confusion goes away, but first and foremost, it's really a brand change that helps reflect this transformation taking place within the company.

[Tyler Brown, Raymond James]

So I do want to talk a little bit about the announcement from last quarter, because it was large. It was interesting. I'm going to call it around this kind of green CapEx. So I think you announced about $1.5 billion capital program. That’s really tied into both the recycling into the R&G market. So first off, maybe we can bifurcate. So of the $1.5 billion kind of how much of it is going to recycling? How much of it is into R&G? We’re going to set the R&G to the side for a moment. Maybe we’ll just start with recycling, but can you talk about how big that investment is? And then we’ll get into about some specifics about it.

[Jim Fish, Chief Executive Officer]

So it’s pretty close to half and half. I mean, it may not be exactly down the middle, but it’s pretty close to half and half. And as we think about recycling, a few of you may have visited our plants. If not, they’re basically a processing plant. We process 10 million-ish, tons, maybe a little bit less. And then we through our brokerage business handle another 5 million to 6 million. So in total, we’re touching in some way shape or form about 15 million tons a year of recyclables. We started a couple of years ago to transition away from a more labor intensive process. So imagine a plant that is probably 20,000 tons a month of material coming in that plant probably employs and this is kind of today’s plant, not tomorrow’s plant, employs 150 people. So we took a plant in Chicago and completely transitioned that to a much more mechanized form of sorting. So optical sorters, and a typical plant might have one optical sorter. This plant has 14 optical sorters. So the capital cost of the plant is higher. But we reduced the labor cost at that plant by somewhere in the neighborhood of 40% to 50% at that plant specifically. And we believe that that at all plants, we can reduce somewhere between 30% and 40% of the labor cost. And at the same time produce a better quality material on the back end. We’ve now done it to three plants. Chicago is the one that I just described, Salt Lake City, E Raleigh Durham. And so Tyler, this acceleration is at least in the first year is largely going to be focused on retooling, rebuilding of plants. We do have some new plants in there in underserved areas. And so there is a combination in that first and second year of – kind of rebuilds plus new, but we’ve weighted it towards the rebuilds because we know exactly what the payback is there. And the payback is excellent with a 30% to 40% reduction in labor. Another common theme that that you heard on the earnings call was that we’re making a strong effort to become less labor depend. So if you – we don’t really talk about things like revenue per employee, but we are a very labor dependent business, 50,000 employees, 38,000 and 40,000 of those employees are line employees. They’re drivers, they’re sorters, they’re helpers, they’re CSRs, they’re hourly employees. Reducing the labor dependency is an important aspect of our go forward strategy. I talked about 5,000 to 7,000 jobs. Nikolaj can talk about what we’re doing with complete automation of our collection operations and that’s through his team. And that will be a significant change that helps reduce labor dependency. But in today’s world and you may have heard me on earnings calls talk about my daughter, my 18 year old daughter, who said, nobody dad, nobody in my class is talking about driving a truck. Everybody’s talking about working for a gaming company or going to college, nobody’s talking about graduating from high school and then driving a truck. And so that generation is maybe not as interested in some of these trade jobs as my generation or my dad’s generation, therefore, we need to reduce labor dependency. And that’s a big part of not only the recycling business, where we’re talking about 30% to 40% reduction in labor, but in collection, in disposal, in corporate roles, 5,000 to 7,000 I think is very achievable.

[Tyler Brown, Raymond James]

So let’s pivot since we’re on the subject.

[Jim Fish, Chief Executive Officer]

Okay.

[Tyler Brown, Raymond James]

So can you talk about of the 5,000 to 7,000? Exactly where does that come from? Is it half and half between call it recycling and maybe automated residential? Or how does that kind of break down?

[Jim Fish, Chief Executive Officer]

It’s probably four or five, six different buckets. I mean, residential is shifting from rear load to ASL is one. We have 2,800, so call it 3,000 rear load trucks, the truck that that picked up your – probably your parents’ neighbourhood and that truck still has one helper and in some cases, two helpers on the back. It’s not the most efficient truck from a productivity standpoint. It’s a cheap truck from a capital standpoint, but it’s not a great truck from a safety perspective. Unfortunately we’ve had people killed behind those trucks when somebody is texting and runs into the back of the truck. If we have a helper back there, it’s typically not good. So from a safety standpoint, it is 70% of our entries take place in the residential line of business and the large majority of those take place in the rear load on the rear load truck, because you have somebody outside of the truck, that’s the most dangerous place. So call it 3,000 helpers that can ultimately come off those trucks. The only challenge there is you have to talk to these municipalities and convince them that everything has to go in the car. Not a difficult conversation if you’re in California, they’re already all converted. Or if you’re in Arizona, in my old area, I used to be in area Vice President in Pennsylvania, a little tougher conversation there, but we think it’s very doable. So there’s a – that’s certainly one big bucket recycling, which we just talked about as another big bucket. As we talk about some of these other positions that Nikolaj can focused on dispatch. And route analysts, we have – I don’t know, 800, maybe 800 dispatchers and route analysts that are busy every day, routing trucks. And so Nikolaj team is pulling together and I don’t want to kind of steal his thunder, but he can talk about it more than I can, but that’s another big area where we can pull jobs out. If we think about customer service, part of what we’ve talked about in the past with customer service digitalization is giving us the ability to we fully automated customer setup last year, which took out what 300 jobs, maybe 200 jobs.

[Nikolaj Sjoqvist, Chief Digital Officer]

I think it was about 150 times…

[Jim Fish, Chief Executive Officer]

150 jobs. All right. I doubled it just for make it sound better, but 150 jobs. So that customer service digitalization gives us the ability to fully automate that experience. A lot of the calls we take, I think about 14 million calls a year into our call centers. And many of those calls are fully automatable. Somebody calls and wants to check the status of the payment. Somebody wants to check the whereabouts of their truck. All of those we’ve automated. And so now this year, we’re starting to transition those customers the way the airlines did years ago. I mean you used to call and make an airline, make a reservation, nobody calls an airline anymore. Unless you’re traveling internationally, but if you’re traveling domestically, you just go onto the website and book your own ticket and it’s simple. That’s the direction we’re going pretty quickly. So that’s a big bucket as well. Even jobs, we’ve just – we talked about spending a fair amount on big systems, HR systems and finance systems. And so we told our board last week that we’ve eliminated 40% of our manual journal entries that should transition into a reduction of approximately 40% of our accountants who are doing that. So there’s a bunch of big categories, all those add up to kind of somewhere in the neighborhood of 4,000 or 5,000 jobs, and then to get you to set 7,000 jobs, maybe more, you have this productivity pickup. So when you transition from rear load to ASL, there is at – we know that because we’ve done it, we’ve done. We’ve had a lot of transitions. There’s a 15% to 20% pickup in productivity. When you go from a rear load to an ASL, because an ASL is just picking up and moving on, a rear load has a helper on the back. In some cases, we have rear load that a guy actually gets out of the truck walks around, throws the can in the back, walks back around, gets in the truck and goes and drives another 50 feet. That is obviously the least productive, but there are about five or six buckets, Tyler that we think add up to 5,000 to 7,000.

[Tyler Brown, Raymond James]

I’m not the best at math, but this seems fairly consequential. I mean, I think on the call you had talked about, maybe these aren’t $100,000 type jobs, but they’re still fully loaded, probably like, you know, $75,000 jobs. So I don’t know if my math is right, but something on the order of maybe $0.5 billion. I mean, this is a pretty big opportunity and I assume that this is something that phases in over a two to five year horizon. This isn’t something that’s just…

[Jim Fish, Chief Executive Officer]

We’ve kind of said three to four. I actually been surprised that there was I asked this morning, I said, how many calls did you get after the earnings call asking you about the 5,000 to 7,000 jobs, he said, basically not. I mean, everybody asked about R&D, everybody asked recycling, nobody asked about that. And that was a significant maybe the reason nobody’s asking is I’ll believe it when I see it. But honestly, if you think about those transitions, that’s not a huge stress to say, we’re going to take 3,000 or 2,000 helpers off the back of a truck. There’s no technology. I don’t need this guy to do that. That’s just buying a different type of truck and there’s – and convincing the municipality to shift to a cart away from a pickup, everything contract. And if I can I take one head off of the truck and I become 15% to 20% more efficient with the driver. So in theory can take 15% to 20% of the drivers out, but we really have had no questions on it. It is a – by the way, some of our drivers, our average driver, our entry level driver now in Houston, Texas is making $80,000. Entry level in the bay area is making six figures. I mean, it’s so – and yet we can’t hire an MBA out of a kind of a second tier school to work for Devina making 55.

[Nikolaj Sjoqvist, Chief Digital Officer]

Yes. And Tyler, I’d say there is opportunity beyond what we’ve just talked about as well, without getting into a lot of specifics. Jim mentioned some of the work we’re doing on sort of the optimization and the automation side of routing. I’ll give you an example to kind of bring it to life. We’ve known for quite a while and we’ve had an independent third party come back and assess this last year that we’ve got the best routing algorithms commercially available. And by the way, we built them ourselves. So our ability to route a truck across a series of stops is better than anything you could buy off sort of the shelf in the marketplace today. It was surprising when we learned this, but we’ve known this for a little while. The trouble is that creating an actual route used to be a fairly laborious process. It would be about six weeks, not just running the technology, but by the timing instilled, the manual process changed, but people to adopt it, but we we’re working on right now. And we’re going to be piloting this thing in April and then scaling it throughout the year in the roll off line of business is fully automating the creation of these routes. And that is a meaning that for every next day, we will create through a series of pretty complicated algorithms and put together that optimal route and feed it to the OBU, the onboard unit on the truck to route the driver. That’s a very big deal because the amount of math that you would need to do as a human being to take a baseline sort of route and adjust it, and ultimately come up with the ideal answer is absolutely incredible. Human being can’t do it. I’ll give you an example. The average dispatch at WM is probably dispatching about 100 tickets or 100 customers a day across a series of routes. If you look at and by the way, you need to know about 70 things about each of those customer service stops to be able to ultimately do the math, that most efficiently routes the truck to be able to put all this together, you’d need to be doing quintillions of calculations to basically optimize those 100 stops. That’s 18 zeros. That’s a lot.

[Jim Fish, Chief Executive Officer]

I said 17 zeros on the…

[Nikolaj Sjoqvist, Chief Digital Officer]

That’s right. And so a human being can’t do that. Well, now what we’re gearing up to and we are running a conference room pilot right now, so limited scale behind closed doors. We’ve already taken several days worth of routes from last year, run it through the algorithm compared what we actually achieved last year, which is again, there was a baseline with a lot of manual intervention to what we are now able to do through this algorithm. And I won’t share the numbers with you because they are – we are still in the process of validating and improving, but suffice to say the impact potential is quite incredible. And that’s just in the roll off line of business. When you start expanding this to other lines of business, like the residential line of business, the commercial line of business, there’s a tremendous amount of impact to be had. And that goes even beyond negating the effects of labor that we’re facing right now, you’re talking about efficiency gains and so forth.

[Jim Fish, Chief Executive Officer]

Not only part of that in terms of the job savings that we’ve really discussed was that dispatcher role and route analysts. We have not talked about the fact that when you do the math, you are so much more productive. And so what’s the efficiency pickup that then enables us to not have to, by the way, this – all of these jobs are high turnover jobs. So there’s not a rift that’s going to take place here. I mean, if we think about CSRs, our turnover for our CSRs, just for that position for 2021 was 75%. So when we take CSRs out in 2022, and we’re planning on taking a pretty significant number out in 2022. We don’t have to pay anybody. We just use attrition, those helpers on the back of the truck, 48% turnover for helpers. I mean, you can imagine, who wants to be a helper on the back of a trash truck. This order that we’re taking out through the automation of these plants is 47% turnover. And then you get down to drivers and that’s down in the 20s, but still as we take that those positions out, as we become more productive, we don’t need 21,000, 22,000 drivers. Maybe we only need 19,000 drivers, but that 2000 or whatever the number is not somebody that we have to pay to leave. They leave on their own and we just don’t replace.

[Tyler Brown, Raymond James]

Right. So but I want to kind of step back and talk about this, because at the Analyst Day, Nikolaj, I mean, we laid out this digitization of Waste Management back then. So it feels like, I mean, where are we on this journey? I mean, it feels like we’re still scratching the surface and this is probably something that can drive continuous improvement and ultimately help your costs per stop or however you define it for probably multi-year – a multi-year timeframe out into the future.

[Nikolaj Sjoqvist, Chief Digital Officer]

So if you think about kind of where we came from, so 2019 was New York Stock Exchange Investor Day where we talked a little bit about tech and customer strategy. I got this job in late 2017. In 2018, if you look at what we had available from a self-service capability perspective, we had a really good looking website with virtually no transactional capability. If you went in and you wanted to submit an order or sign up for service, it looks like you were sort of interacting with an e-comm platform. But really what you were doing was filling out a form that would be sent to some human being probably in Phoenix. Behind the scenes, he would take all that information, key it into a system, pick up the phone, talk to a number of other folks and ultimately make it feel like an e-comm transaction. That whole platform has now been built out. We’ve got wm.com, which is our customer digital experience platform, one of five platforms that we have is fully built out and fully usable. We’re still evolving features and adding capabilities. But it is already – and I think we’ve shared some of this on earnings call. So this isn’t new, but close to half of our residential open market business comes through that platform. It is our fastest growing sales channel for our collection line of business. So we are transacting more and more business and signing up more and more customers through that platform. That’s a good thing. Of course, it’s one thing to sign you up. It’s another to self – so that, when you’ve got questions about the bill, you want to know when the truck’s going to arrive, you want to schedule an extra pickup, you can do that. Those are some of the capabilities that we are – we’re building out, we have bill pay, of course, we’ve got ETA or estimated time of arrival. But you can always add more. But we have a platform that is now, the front end looks great, but it’s connected into that back end so that when we give you data, it is reliable. So we are this year together with the customer organization and Mike Watson as the Chief Customer Officer on a big drive to get customers increasingly to adopt those capabilities and to make it frankly very hard to say no. Jim mentioned the example of a customer that called in to complain only to realize that it wasn’t Waste Management he had a complaint with. Million of those – 14 million calls that Jim mentioned are customers that aren’t even customers of ours calling. Let’s not even route those to an agent, let’s take them out. So to speak in the phone system, have them self identify and not even get through to an agent. If you want to pay the bill, pay the bill online or using the app, as opposed to when they come through. So we’ve matured those capabilities, it’s a great deal. But I think what might be more exciting from an impact perspective is all the stuff that’s happening on the back end on the routing side. Because if I remember back to 2019, when we talked, what we were doing at routing and we’ve use words like optimization so forth. And as I said to the Board a couple of weeks ago, optimization means different things, different people. Back in 2019, really what we were doing was – it was called service delivery optimization. It was a lot of process change. It was basically you take the beginning 15 minutes of the day and the end 15 minutes a day and you do everything you can to slim down that amount of time. So drivers aren’t standing around idle that was basically process and performance management, not a lot of tech. Then we move to M100, which we talked about for a little bit. M100 was about taking that middle part of the day and optimizing. What does that mean? That meant that when we created a route for a driver, we would show in a tool. So for a route manager, the route that the driver was supposed to take and then overlay the actual route they did take. So they could be performance management and coached to follow the route originally prescribed. What we’re doing now is we are fully automating the creation of these routes. And again, through all that very complicated math, that is driven by our AI platform called Newton leveraging 40 best in breed cloud-based applications to cobble this whole thing together. And the impact potential of that, I mean, we can’t share numbers and we shouldn’t share numbers, because we’re still in the process of piloting and fine tuning. But that is what is so incredibly exciting. So it’s not just about connecting the front to the back, which is important for self service. It’s about optimizing and automating how we go and put some of these things together from an operations perspective, with a view to reducing the labor pressure, but also frankly, unlocking some cost savings to capture.

[Tyler Brown, Raymond James]

People look at this industry as old and antiquated in a way, but there’s this move from the front end to capture and let’s say I’m a Waste Management customer. I mean, I want to talk to you, but I don’t really want to talk to you. So I want to have data flow back and forth. I want to know that maybe you’re not going to pick me up on Tuesday. And so there’s a customer service aspect. And then even on the back end there’s more of an optimization and kind of driving costs down.

[Jim Fish, Chief Executive Officer]

But when you take the human interaction out of the middle of that, I mean, there’s the customer on one end and the onboard unit on the other end. I mean, there isn’t anybody out there, not UPS, not FedEx, certainly not in our industry, short of maybe Amazon that is truly optimizing the entire routing process through a process as opposed to a person. So it’s a big change for us. And we think that there’s a huge – we have to go down this labor reduction road. I mean, we’ve talked about a lot. This is not – it’s not going to improve. I mean, these trade type jobs are not going to become easier to fill. So this is just one of seven or eight, five or six, whatever areas there are that we can reduce risk.

[Nikolaj Sjoqvist, Chief Digital Officer]

The biggest challenge that I think we have from a tech perspective, I say this to my direct ex have all heard this as they’ve joined. I’ve got a relatively new management team that I’ve put together over the last several years. The biggest challenge at WM is prioritizing the opportunity, because there’s so much of it. And what a great thing that is. It’s not like we’re just trying to figure out how to go. There’s so much opportunity to your point on, we’re sometimes viewed as sort of old and antiquated. But if you told me three, four years ago that I’d have a director of machine learning that was building the most sophisticated routing algorithm sort of known to man, I would’ve said, really, is that where we’re going to be, but that’s where we are. So we’ve come an awfully long way. And I continue to be very bullish about the future because there is so much opportunity. And the hard part frankly, is prioritize those things that are going to in addition to de-risking the company are really going to move the needle from a cash register and bottom line perspective.

[Tyler Brown, Raymond James]

And so where do you think though, competitively also? I mean, how big of a competitive advantage over time? Do you think that this really builds a moat versus a lot of the smaller hauls who may not be able to offer a digital offering, may not be able to...

[Jim Fish, Chief Executive Officer]

I think part of the competitive advantage Tyler is, is looking at our cost structure. And does it differentiate us to the customer? It does. But where I want to see the competitive advantage is instead of being OpEx 61% of revenue, how about 55%? And how much can I – so I’m looking at it more from a cost standpoint than, okay, the customer’s going to make a decision they’re going to opt for WM versus Connections or somebody else because we have a pretier front end and it works well. I think there is some differentiation there. But Nikolaj and I have talked about this a lot, which is, is this top line or bottom line. I think it’s a bit of both. But I’m really focused on the bottom line. I’m focused on taking costs out of the organization. That’s what I’m really focused on. And to the extent that I – he talked about it being, a revenue driver, because it’s now our fastest growing sales channel. That’s great. That’s not what I’m focused on, though. I’m focused on how do I get from 61% to 55%, maybe 55% below to 53%. And at the same time, offering a better service, a better product.

[Tyler Brown, Raymond James]

But it feels like this is a little bit more of an intermediate term opportunity. So in the near-term, I mean, we’re feeling labor pressure today. So can you talk a little bit just as we pivot away from that discussion, just a little bit about your flexibility around price and your ability to offset underline unit cost inflation, because quite frankly, that’s what everybody out here is really focused on.

[Jim Fish, Chief Executive Officer]

By the way, I don’t know what your definition of intermediate term is, because I think we’ll take out, we talk about 2022 taking out some of these jobs. We haven’t given the number for 2022, but we’re going to be taking out some of these jobs in 2022 and 2023. And it’s not insignificant. Though to transition to price, I mean, look, I think prices is a natural mechanism to combat inflation. We’re putting as much price as we can possibly put on the street. It’s why our churn – what tells me that there’s real strong inflation out there is that our churn numbers are at historic lows, and yet we’re putting out significant price increase and not creating any churn. So those customers realize that yes, they may not like seeing a 20% increase, but they know that they’re going to get a 20% increase with anybody that they go to. So we’re using price aggressively to combat inflation. And I think we’re being very successful with it. We’ve talked about what we think – what the expectation is for 2022. It’s not going to surprise me if we exceed that expectation. But look, anybody that says that inflation isn’t real – is living in normal, because it is absolutely...

[Tyler Brown, Raymond James]

It’s probably bad there too.

[Jim Fish, Chief Executive Officer]

Maybe.

[Tyler Brown, Raymond James]

Yes, I’m not sure. So here’s the problem. That was too much fun, because we’re up on our 30 minutes. So I appreciate everybody for joining us and thank you so much.

[Jim Fish, Chief Executive Officer]

All right. Thanks, Tyler.