Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Waste Management Inc (WM, Financial) achieved double-digit operating EBITDA growth in the second quarter, maintaining their pace to meet the full-year outlook.
- Quarterly operating EBITDA margin reached 30% for the first time in the company's history, driven by technology investments and effective pricing strategies.
- The acquisition of Stericycle is expected to add complementary business platforms and drive higher growth in the medical waste industry.
- WM closed more than $750 million in solid waste acquisitions through July, strengthening core operations in new geographies like Long Island, New York.
- Investments in renewable natural gas projects and recycling automation are expected to drive strong returns and environmental benefits, with several projects coming online in 2024.
Negative Points
- Volume in the roll-off line of business continues to show softness, particularly in the temporary business driven by homebuilding and the industrial sector.
- Risk management costs impacted the quarterly results, contributing to a 50 basis point headwind.
- Lower industrial volumes and elevated commodity prices are expected to create headwinds in the second half of the year.
- The integration of tuck-in acquisitions tends to come in at a lower contribution margin than the base business, impacting overall margins.
- Minor delays in the construction of renewable natural gas plants have resulted in a negative impact of approximately $11 million.
Q & A Highlights
Q: Hey, Devina. So obviously solid quarter. Great start to the year on. I think last call you mentioned north of 30% margins in Q2, possibly north of 31 in Q three, let's say Q2 came in more around 30. So I just wanted to see if that north of 31 still a good placeholder or should we maybe think about moving that down a smidge.
A: So I'll start by highlighting that the one item that was different than our expectations at the end of April, when we spoke about that a little north of 30% for Q2 is the risk management impact of 50 basis points in the quarter. So if we had not had that item, which we couldn't have predicted we would have come in at or above the target that I provided and on the call last time. But I would say about when we look forward to Q3 what's changed a little bit? There's a couple of things. One is recycled commodity prices and you guys know, but we have a different geography than our competitors do with regard to the impact of recycled commodity prices. And that was a 40 basis point headwind in the quarter. And we expect elevated commodity prices to continue into the back half of the year. So there is a little bit of a headwind that we weren't projecting from recycling brokerage in particular, that would carryover. And then in addition to that, with lower industrial volumes that John mentioned, the flow-through on industrial volumes is generally strong, 40% levels. And so that again is one of the things that created a headwind in the quarter and that would impact Q3. The third item relates to the tuck-in acquisition contributions. As you know, based on where we are in integration processes, integrated M&A revenue and activity tends to come in in early innings at a lower contribution margin than our base business. So what I would say is that right now, our Q3 outlook is in the range of 30.5% to 31% with all those things taken into account.
Q: And then as we think about EBITDA dollars, so I just wanted to make sure I understood some of the moving pieces to the guidance. So because I believe at the end of Q1, you had only spent like maybe $10 million on acquisitions. You mentioned 750 million in 3G. And I would have thought that that would have obviously including Warner Brothers. So I would have thought that would have helped maybe the guidance. I assume there's the EBITDA associated with that. So I guess one, can you talk about what the year revenue contribution from M&A should be in 24? And then can you just talk about, you know, maybe some of the puts and takes because again, I would have thought there would have been some EBITDA contribution there. Maybe there's some you mentioned a few things breaking against you.
A: Yes, I wish John, a good question. I mean, if you look at what we did in Q2 was about 77 million of revenue that was acquired. The seven 50 that we put that we've all talked about represents about 300 million of acquired revenue by the end of the year. So hopefully that clarifies a little bit. And then to debate what Devina and I talked about is there is some benefit that we've talked about in the back half of the year that 25 ish million. That will be a contribution from some of the M&A we've referenced. So in terms of overall EBITDA growth for the year, what I would say is when we look at the first half of the year, right? The first half of the year, solid waste EBITDA has grown 415 million, quite remarkable. The headwind that I talked about in risk management. It shows up in the corporate and other category. And so what you see is there was more of an offset to that solid waste growth in the first in the second quarter than what we experienced in the first quarter. But the sustainability businesses, we still expect to be on track to generate that $115 million of EBITDA contribution to the year. And when we think about what happened over the second quarter, that may not be showing up as a direct increase in that amount, it really is a put intake story. One is the value the incremental value we expect from higher commodity prices in the recycling business, partially offset by the impact of a slowdown in some of the construction projects on the renewable energy business. Now we're talking weeks, not months here, right? This is the contributions that we now expect to start to ramp more in the fourth quarter than what we were expecting earlier in the second half of the year. So all in all, what I would tell you is the EBITDA growth story for us is approaching 10% and in the year and still most of that coming from the solid waste business with the contributions coming from the sustainability business in total tracking according to plan, there was a put and take.
Q: Hi, this is Hilary will be on for Toni Kaplan. Good morning, guys. Great quarter. So yes, speaking of the election, sorry to bring it up, but we've had a couple of number of inquiries around the potential implications of it, depending on who's elected or if so, who's in a house, how would you expect RNG and rents to be affected or if at all? And what sort of increase decrease do you see potentially in your RNG projects?
A: I'll answer that one. We've been obviously tracking this very closely. And I think it's important to note related to our RNG business as we're in a very different time than we were in the previous Trump administration. You've really seen a lot more development on plants. We've seen the voluntary market really shored up, and we also have the RVO that is in place through 2025. So you look at analysts that really cover the RNG industry by any measure, most are saying that they don't expect a significant decrease in rent pricing and really more solidly in that two 50 range in a potential Trump presidency. And as you know, that is well above our investment thesis of $26 per MMBTU. So Tony, real quickly. I know Terry did a great job of answering that and she is obviously right with you. I would just tell you, we've always said no matter who's in office, we're pretty agnostic about about that. I mean, we all have our own personal preferences. But the business itself, it does really well in just about any regulatory environment. Short of somebody coming in and saying landfills are closed all tomorrow, morning. But But short of that, we are pretty agnostic with respect to regulation, whether it's the Chevron doctrine, whatever it is. We do well in just about any environment.
Q: Your line is open for your short break, you are Good morning, everyone, tomorrow and Jim, on Stericycle, I'm wondering if you just weigh in because historically the Company has really struggled to push pricing. And I think that's been because of the autoclave business. And you folks in your businesses are obviously leaders in driving pricing and return. So I'm wondering if
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
