WM reports healthy Q2 profits

Houston-based waste and recycling firm WM has cited disciplined pricing and cost optimization as factors helping its net income rise by 4.8 percent in the second quarter of 2023 compared with a year ago.

“We are pleased that our disciplined pricing is keeping pace with rising costs, we are achieving meaningful improvements in frontline turnover, and we are driving leverage on the selling, general and administrative (SG&A) expense line,” WM President and CEO Jim Fish says.

The first half of the year was not without its challenges. “Our teams have executed well during the first half of 2023, delivering solid results despite persistent inflation in many cost categories, lower-than-anticipated renewable energy prices, and slower-than-planned event-driven volumes," Fish says.

“Considering these market-driven impacts and Hurricane Ian cleanup volumes that were significantly lower than expected, we are well positioned to deliver strong growth in the back half of the year as these pressures abate.”

The company also provided an update on WM’s recycling- and sustainability-related efforts in comments accompanying the results. “Our teams also continue to execute on our sustainability growth strategy, as three sustainability growth projects came online during the quarter,” he says.

WM management expects its sustainability-related growth investments will deliver approximately $740 million in incremental annual adjusted operating earnings before interest, taxes, depreciation and amortization (EBITDA) contributions beginning in 2026, with approximately $500 million coming from renewable energy investments and approximately $240 million coming from recycling investments.

On the recycling front, the company completed two major recycling projects in the second quarter, including technology and automation upgrades at its material recovery facility (MRF) in Surprise, Arizona, and the opening of a MRF in the Toronto area.

“The company’s recycling investments lower labor and processing costs, improve efficiency and enhance material quality, driving benefits in any commodity market,” WM says.

On a less positive note, the firm says revenue contributions from its recycling-related acquisitions are evolving at a slower pace than expected.

Also in the second quarter, WM opened its Eco Vista renewable natural gas (RNG) facility in Springdale, Arkansas, the sixth WM-owned RNG facility and the second of the company’s sequence of 20 planned projects in its sustainability growth program.

Regarding the future of those investments, WM notes that in June, the U.S. Environmental Protection Agency finalized renewable fuel volume obligations for 2023 through 2025, thus “providing visibility and stability to the market for renewable fuel standard credits.”

The firm says greater demand for RNG as a transportation fuel strongly supports the blended average pricing assumption of $26 per metric million British thermal units (MMBtu) used to develop our investment strategy and strengthens the case for potential upside.

In terms of overall hauling and waste handling operations, WM's collection and disposal yield was 5.8 percent in the second quarter, down from the 6.2 percent rate achieved in the second quarter of last year.

On the volume front, WM’s total company collection and disposal figures for the quarter each increased by 0.2 percent in the second quarter of 2023 compared with one year ago. That represents slower growth compared with the 1.6 percent growth in collection and 2.3 percent growth in disposal tonnages achieved in last year’s second quarter.

Nonetheless, WM's operating EBITDA in its collection and disposal business increased by approximately $95 million to $1.63 billion in the second quarter of 2023. “Operating EBITDA as a percentage of revenue in the company’s collection and disposal business was 31.6 percent for the second quarter of 2023 compared to 31.2% for the second quarter of 2022,” the firm says.

Operating EBITDA in WM’s recycling business declined by $41 million compared with the second quarter of 2022. WM says the decline was driven by the approximately 55 percent decrease in market prices for single-stream recycled commodities, with prices of both recycled paper and PET bottles taking particularly hard hits.

Regarding its MRFs, WM says its automated facilities continue to see strong improvements in product quality, throughput and labor costs, which is mitigating some of the recent commodity price pressures on earnings.

Operating EBITDA in the company’s renewable energy business declined by $22 million compared with the second quarter of 2022, which WM says was driven in part by decreases in the value of renewable fuel standard credits and lower energy prices.

Looking ahead, WM is forecasting total company revenue growth to be between 3.25 percent and 4.25 percent. The firm says this is lower than prior expectations by 100 basis points at the midpoint, adding "This revision is largely related to the sustainability businesses, where electricity and natural gas prices are lower than expected and recycled commodity prices are now expected to be lower during the second half of the year than initially planned.”

“As we move into the back half of 2023, we remain focused on cost optimization, efficiency improvements, and solid execution on pricing to overcome top-line pressures from lower recycling commodity prices and slower than expected event-driven volumes,” Fish says. “We expect this focus to continue to translate into strong margin expansion.”