WM Touts Strategic Capital Investments in Renewable Energy, Recycling in 2022 Outlook

Despite continuing inflationary cost pressures, Waste Management, Inc. (WM) reported robust Q4 2021 results and provided anticipated figures for 2022.

Core pricing surpassed Q4 2019 figures, rising to 5.1 percent in Q4 2021, up from 3.2 percent in 2020 and 4.2 percent in 2019. Full-year core price arrived at 4.8 percent in 2021, a sharp rise from 2.9 percent the previous year.

"Our strong operational and financial performance continued throughout 2021, delivering full-year results achieved or exceeded our financial guidance, which we increased from our original expectations twice during the year," said Jim Fish, WM CEO. "We had record core price in both our landfill and residential businesses to areas we've been particularly focused on over the last couple of years. Strong core price translated into the best collection and disposal yield that we've seen in more than a decade."

WM's $4.6 billion acquisition of Advanced Disposal aided in $36 million of operating cost and SG&A synergies. Since the October 2020 purchase, the company has realized more than $100 million in synergies. Between $50 million and $60 million were realized in 2021. 

"In 2021, we captured SG&A synergies from the acquisition ahead of schedule and started to realize the benefits of our technology investments, particularly by optimizing our sales coverage model, growing our digital sales channel and streamlining the customers in that process," said Devina Rankin, WM CFO and executive vice president. "We're confident that our technology investments will continue to deliver value as we differentiate WM and reduce our costs - both operating costs and the SG&A line."

Q4 volumes grew to 2.8 percent in 2021, up from a decline of 2.6 percent the previous year. WM's full-year volumes totaled 2.8 percent, up from a decline of 4.5 percent the previous year. Collection and disposal yields rose to 3.7 percent in Q4 2021, up from 2.3 percent year over year. Full-year yield was 3.5 percent, up from 2.2 percent in 2020.

"Organic growth trends in the first few weeks of 2022 have been encouraging, even as some parts of the U.S. and Canada have seen spikes in Omicron cases during January, commercial yards are tracking above 2021 levels, and while industrial hauls are modestly below last year, we see that as mostly due to weather disruptions in a few areas across the country," indicated John Morris, WM COO and executive vice president.

Capital expenditures to support WM's business activities are expected to be in the range of $1.95 billion and $2.05 billion in 2022, with revenue growth anticipated between 5.8 percent and 6.2 percent.

The Houston-based waste and environmental services company saw net cash provided by operating activities rise to $991 million in Q4 2021, up from $731 million, or a $238 million increase, Q4 2020. 

A main contributing growth factor included the rise in operating EBITDA as well as lower interest and cash taxes paid, according to the company. Operating EBITDA as part of WM's collection and disposal sector was $1.3 billion in Q4 2021, a rise from $1.28 billion year over year. Both figures were adjusted on the same basis as total company operating EBITDA.

WM's full-year operating EBITDA was $5.52 billion, or 31.6 percent of revenue, compared to $4.85 billion, or 31.9 percent of revenue, the previous year. In 2022, the company expects adjusted operating EBITDA to reach a range of $5.325 billion to $5.425 billion. As pricing fluctuates WM anticipates an expansion of operating EBITDA margin in the second half of 2022 attributed to operating efficiencies with the application of technology. 

"A big part of that management of our cost structure will be to materially improve our labor efficiency through the application of the technology investments we made over the last 18 months," Fish said. "Our expectation is to trip between five and 7000 positions over the next four years without replacements, as these positions have become difficult to source, and we expect that we'll continue to be the case. At the same time we continue to focus on providing the best workplace for our employees and leveraging our asset network for growth."

Technology integration remains a core focus, along with strategic investments in the company's recycling and renewable energy lines of business. WM has allocated an "incremental" $550 million toward capital expenditures on projects related to the segments in 2022, saying that it intends to bolster "renewable energy generated from its landfill network, automating recycling processing to reduce costs and improve product quality, and expanding its leadership in single-stream recycling across North America."

And for good reason. Operating EBITDA in WM's recycling segment grew $44 million year over year in Q4. Full-year results showed a $184 million increase when compared to 2020, demonstrative of the increase in market demand for recycled commodities as well as labor savings due to the previously-mentioned technology and equipment improvements. The company estimates a 10 percent increase in the market prices for recycling commodities in 2022 from 2021 prices, with an expected average of $125 million per ton.

Advancements in Single-Stream Recycling

Infrastucture advancements at WM's materials recovery facilities (MRFs) have signaled a decrease in operating costs of single-stream recycling services, allowing for a "substantial" improvement in the automated sorting process at four of the company's 49 MRFs. 

As a result of the boosted demand for recycled materials, the company has budgeted approximately $275 million in 2022 and an incremental $525 million from 2023 to 2025 to "accelerate its investment in technology automation in a number of our single-stream facilities and to expand its recycling footprint including in under-served markets."

"Our sustainability businesses are central to our growth strategy and we're pleased with the strong results were achieving in both the recycling and renewable energy businesses," Morris said. " And recycling each quarter of 2021 earned a spot among our five most profitable quarters of all time, and we're anticipating an equally strong year in 2022."

The expected investments are estimated to have "strong returns and payback periods" of six years based on a blended commodity price of $125 per ton.

"By 2026, the company expects the planned automation benefits and market expansion to generate incremental annual run-rate operating EBITDA of approximately $180 million, which will flow through to free cash flow as growth," WM wrote.

Renewable Energy Investment Advances WM Sustainability

Q4 renewable energy figures increased $18 million from the previous year quarter, attributed to a rise in the value of renewable fuel standard credits. Full-year operating EBITDA in this line of business grew $81 million in 2021 from 2020.

Landfill gas-to-energy projects continue their positive momentum. Four renewable natural gas (RNG) plans are currently in operation, with WM bringing two additional plants online in 2022. According to the company, the facilities will generate an estimated 3.6 million MMBtu throughout the year.

"While these investments will be reported as a component of our capital expenditures, and therefore reduce our traditional measure of free cash flow, we see these investments to be similar to an acquisition dollar, they will produce high return growth as a strong complementary existing business," said Rankin.

WM plans to expand its owned-asset network to 21 RNG plants by 2026, beginning with a contribution of $275 million in 2022 and an addition $550 million between 2023 and 2025. 

Overall, incremental operating cash flow growth is "expected to be more than offset" through an incremental growth in capital investments, with an expected annual run-rate operating EBITDA of more than $400 million that the company says will trickle through to free cash flow as growth.

 "We are excited about planned growth investments in our recycling and renewable energy businesses that are expected to total more than $1.5 billion through 2025," Fish said. "These growth investments are intended to further WM’s sustainability leadership position by increasing recycling volumes by more than 1.5 million tons and growing renewable natural gas generation by 21 million MMBtu by 2026. These investments will deliver circular solutions for our customers and drive environmental value to the communities we serve while also providing very attractive returns to our shareholders.”