WM earnings show company ends 2020 on right foot

Waste Management Inc., Houston, has announced financial results for the fourth quarter of 2020 as well as the full year. The company’s fourth-quarter results continued the positive momentum from the third quarter as organic revenue growth in the collection and disposal business was nearly flat year-over-year and improved 250 basis points sequentially and 890 basis points from the low in the second quarter.

Additionally, the company maintained its focus on cost and capital management. As a result, fourth-quarter adjusted operating earnings before interest, taxes, depreciation and amortization (EBITDA)) increased 4.1 percent year over year when normalized to exclude the acquisition of Advanced Disposal as well as timing differences in the government approvals of alternative fuel tax credits. This growth was achieved despite macroeconomic challenges stemming from the COVID-19 pandemic.

“I am extremely proud of how our team worked through the challenges during 2020 to provide reliable, high-quality service and continued to do so as we welcomed new customers and team members following our acquisition of Advanced Disposal,” Waste Management President and CEO Jim Fish says. “Our focus on operational execution and efficiency allowed us to match the highest full-year adjusted operating EBITDA margin we have ever achieved at 28.4 percent. So, in a year where many companies suffered significant financial impacts from the pandemic and resulting economic crisis, Waste Management delivered full-year 2020 results within 1.5 percent of our record-high 2019 adjusted operating EBITDA.

“Complementing our strong financial performance is the recognition that we continue to receive for leading the way to a more sustainable future. Fortune magazine recently named Waste Management to its 2021 World’s Most Admired Companies List, and for the fifth consecutive year, CDP included Waste Management on its ‘A List’ for climate leadership. We remain committed not only to managing waste responsibly but also investing in recycling infrastructure and renewable energy projects and collaborating with our stakeholders to create new, sustainable environmental solutions.”

Key highlights for the quarter and full year include:

Revenue

• In the fourth quarter, revenue increased $185 million in the company’s collection and disposal business compared with the fourth quarter of 2019, primarily driven by $202 million in acquisition revenue and $79 million of growth from yield partially offset by $93 million in volume declines. For the full year, revenue decreased $141 million in the company’s collection and disposal business compared with 2019, primarily driven by $669 million in volume declines partially offset by $299 million of growth from yield and $244 million in acquisition revenue.
• Core price for the fourth quarter of 2020 was 3.2 percent compared with 4.3 percent in the fourth quarter of 2019. For the full year, core price was 2.9 percent for 2020 compared with 4.2 percent in 2019.
• Collection and disposal yield was 2.3 percent in the fourth quarter of 2020 compared with 3.2 percent in the fourth quarter of 2019. For the full year, collection and disposal yield was 2.2 percent in 2020 compared with 2.8 percent in 2019.
• The company’s 2020 pricing results were muted relative to historical results due to deliberate customer-centric steps taken during the second quarter to temporarily suspend price increases and certain fees for customers impacted by the COVID-19 pandemic. The company says it remains committed to its pricing programs as evidenced by the company’s strong post-collection and residential yield.
• Total company volumes declined 2.6 percent in the fourth quarter of 2020 compared with a decline of 5.1 percent in the third quarter of 2020 and a decline of 0.4 percent in the fourth quarter of 2019. For the full year, total company volumes declined 4.5 percent in 2020 compared with growth of 2.3 percent in 2019.

Cost management

• Total company operating expenses were 61.5 percent of revenue in the fourth quarter of 2020 compared with 60.2 percent in the fourth quarter of 2019. The increase was primarily driven by an unfavorable comparison for alternative fuel tax credits of 150 basis points. For the full year, total company operating expenses were 61.4 percent of revenue in 2020 and 2019.
• Selling, general and administrative (SG&A) expenses were 12.5 percent of revenue in the fourth quarter of 2020 compared with 11.6 percent in the fourth quarter of 2019. On an adjusted basis, SG&A expenses were 10.4 percent of revenue in the fourth quarter of 2020 compared with 10.7 percent in the fourth quarter of 2019. For the full year, SG&A expenses were 11.4 percent of revenue in 2020 compared with 10.6 percent in 2019. On an adjusted basis, SG&A expenses were 10.2 percent of revenue in 2020 compared with 10.3 percent in 2019.
• The recently closed Advanced Disposal acquisition increased operating expenses as a percentage of revenue by 40 basis points in the fourth quarter of 2020 and had an immaterial impact on adjusted SG&A expenses as a percentage of revenue in the fourth quarter of 2020.

Profitability

• Total company operating EBITDA was $1.09 billion, or 26.8 percent of revenue, for the fourth quarter of 2020 compared with $1.05 billion, or 27.3 percent of revenue, for the fourth quarter of 2019. On an adjusted basis, total company operating EBITDA was $1.14 billion, or 28.1 percent of revenue, for the fourth quarter of 2020 compared with adjusted operating EBITDA of $1.12 billion, or 29.1 percent of revenue, for the same period in 2019. The margin decreases were driven by an unfavorable comparison for alternative fuel tax credits of 150 basis points.
• For the full year, total company operating EBITDA was $4.11 billion, or 27 percent of revenue, for 2020 compared with  $4.28 billion, or 27.7 percent of revenue, for 2019. On an adjusted basis, total company operating EBITDA was $4.32 billion for 2020 compared with adjusted operating EBITDA of $4.38 billion for 2019. Adjusted operating EBITDA was 28.4 percent of revenue in both years, demonstrating the company’s focus on controlling costs in the lower volume environment
• The recently closed Advanced Disposal acquisition had a negative 50 basis point impact on adjusted operating EBITDA as a percentage of revenue in the fourth quarter of 2020.
• In the fourth quarter of 2020, the company realized between $10 and $15 million of annualized run-rate synergies from the acquisition of Advanced Disposal.

Free cash flow and capital allocation

• In the fourth quarter of 2020, net cash provided by operating activities was $753 million compared with $1.02 billion in the fourth quarter of 2019. For the full year, net cash provided by operating activities was $3.4 billion in 2020 compared with $3.87 billion in 2019. The year-over-year comparisons were impacted by an increase in cash taxes, which was due in large part to the tax gain realized on the sale of assets and businesses to GFL Environmental.
• During the second and third quarters of 2020, the company deferred payment of payroll taxes as provided for by the CARES (Coronavirus Aid, Relief and Economic Security) Act. In light of the company's financial performance and operating cash flow, management elected to pay the previously deferred 2020 payroll taxes in the fourth quarter. While there is no impact of this decision on the comparison of 2020 and 2019 cash flow from operations, this decision decreased fourth quarter and full-year 2020 cash flow by approximately $120 million from the prior outlook.
• In the fourth quarter of 2020, capital expenditures were $394 million compared with $286 million in the fourth quarter of 2019. For the full year, capital expenditures were $1.63 billion in 2020 compared with $1.82 billion in 2019 as the company took steps to reduce and defer certain aspects of capital spending.
• In the fourth quarter of 2020, the company closed on the sale to GFL Environmental of the assets required to be divested by the U.S. Department of Justice in connection with the Advanced Disposal acquisition. Proceeds from divestures were $865 million during the fourth quarter of 2020, with $856 million of this related to the divestitures to GFL Environmental. For the full year, proceeds from divestures were $885 million in 2020 compared with $49 million in 2019.
• In the fourth quarter of 2020, free cash flow was $1.22 billion compared wth $756 million in the fourth quarter of 2019. For the full year, free cash flow was $2.66 billion in 2020 compared with $2.11 billion in 2019.
• During the fourth quarter of 2020, the company paid $231 million of dividends to shareholders.

2021 outlook

Revenue growth

• Total company revenue growth is expected to be between 10.75 percent and 11.25 percent. Combined internal revenue growth from yield and volume in the collection and disposal business is expected to be between 4 percent and 4.5 percent, primarily driven by the company’s pricing programs which are expected to result in core price of 4 percent or greater and yield of approximately 2.5 percent.

Profitability

• Adjusted operating EBITDA is expected to be between $4.75 and $4.9 billion for the full year.
• Synergies from the completed acquisition of Advanced Disposal are included in this measure and are expected to be between $50 million and $60 million in 2021.

Free cash flow and capital allocation

• Free cash flow is projected to be between $2.25 and $2.35 billion.
• Capital expenditures are expected to be in the range of $1.78 to $1.88 billion.
• The company is committed to returning its leverage ratio, as defined in its revolving credit facility financial covenant, to its targeted long-term range of between 2.5 and 3-to-1 during 2021.
• The board of directors has indicated its intention to increase the dividend by $0.12 per share to $2.30 on an annual basis for an approximate annual cost of $975 million. This represents the 18^th consecutive year of increases in the company’s per-share dividend. The board of directors must separately approve and declare each dividend.
• In December 2020, the board of directors refreshed the company’s share repurchase authorization, allowing for the repurchase of up to $1.35 billion of the company’s common stock, signaling confidence in the cash flow outlook.

Fish concludes, “In 2020, we quickly and successfully learned to operate our business with a lower cost structure while maintaining our focus on exceptional customer service. We also completed the acquisition of Advanced Disposal and accelerated our customer service digitalization investments, all while matching our highest adjusted operating EBITDA margin and generating strong cash flow. In 2021, we will continue to make investments in technology that transform our business and integrate the Advanced Disposal business, and we are well-positioned to generate strong returns.”