Waste Business Journal

Waste Management Q2 Resiliant Amid Pandemic Effects

Date: July 30, 2020

Source: Waste Management, Inc.

Waste Management Announces Second Quarter Earnings

Stronger than Expected Financial Performance Demonstrates Business' Resiliency and Disciplined Focus on Cost and Capital Management

HOUSTON--(BUSINESS WIRE)--Jul. 30, 2020-- Waste Management, Inc. (NYSE: WM) today announced financial results for the quarter ended June 30, 2020. Revenues for the second quarter of 2020 were $3.56 billion compared with $3.95 billion for the same 2019 period. Net income for the quarter was $307 million, or $0.72 per diluted share, compared with $381 million, or $0.89 per diluted share, for the second quarter of 2019.^(a) On an adjusted basis, net income was $372 million, or $0.88 per diluted share, in the second quarter of 2020, compared with $470 million, or $1.11 per diluted share, in the second quarter of 2019.^(b)

The Company's adjusted second quarter 2020 results exclude $0.12 per diluted share from non-cash impairments of landfill assets primarily related to energy services activities, $0.03 per diluted share from advisory costs incurred in connection with the pending acquisition of Advanced Disposal Services, Inc., and $0.01 per diluted share from costs incurred to support its implementation of a new enterprise resource planning system.

"I am proud of how our employees have continued to provide dependable, essential services to our customers and communities during the pandemic," said Jim Fish, Waste Management's President and Chief Executive Officer. "While keeping health and safety as the top priority, the team adapted through difficult circumstances, finding ways to improve efficiency across the collection and disposal business and reduce discretionary spending.

"We saw robust improvements in volumes and earnings each month as we progressed through the quarter with June standing out as the strongest month. This early stage of economic recovery combined with our successful cost flexing in the second quarter provide greater clarity for our 2020 financial results under current economic conditions."

As previously announced, Waste Management and Advanced Disposal have agreed to revised acquisition terms along with an agreement to sell substantially all anticipated regulatory divestures to GFL Environmental. Both transactions are expected to close by the end of the third quarter of 2020. The Company continues to maintain a strong balance sheet and liquidity position, with its current and forecasted post-acquisition leverage ratio well within the financial covenant in its revolving credit facilities. The Company has recently entered into a supplemental $3 billion revolving credit facility maturing July 27, 2021, to be used for general corporate purposes, including funding a portion of the Advanced Disposal acquisition and refinancing of indebtedness.

KEY HIGHLIGHTS FOR THE SECOND QUARTER OF 2020

Revenue

• In the second quarter of 2020, revenue declined $331 million in the Company's collection and disposal business, driven by $386 million in volume declines partially offset by $55 million of yield growth.
• Core price for the second quarter of 2020 was 1.3% compared to 4.2% in the second quarter of 2019.^(d)
• Collection and disposal yield was 1.6% in the second quarter of 2020 compared to 2.7% in the second quarter of 2019.
• The Company's second quarter 2020 pricing results were muted relative to historical results and our initial full year expectations due to proactive customer-centric steps to temporarily suspend price increases and certain fees for customers impacted by the COVID-19 pandemic. The Company remains committed to its pricing programs.
• Total Company volumes declined 10.3% in the second quarter of 2020. Volumes declined almost 11% in the commercial line of business, 16% in industrial, and 18% in landfill, primarily related to the COVID-19 pandemic. Adjusting for natural disaster volumes that occurred in the second quarter of 2019, landfill volumes declined 13% in the second quarter of 2020.
• We estimate that business interruptions related to the COVID-19 pandemic had a negative revenue impact of approximately $400 million.

Cost Management

• The Company remains focused on taking steps to manage costs to mitigate the impact of the COVID-19 pandemic. Steps include swift labor and route optimization in response to reduced volumes, reducing overtime hours, limiting hiring, eliminating non-essential expenses and costs, and reducing incentive compensation accruals.
• Operating expenses as a percentage of revenue improved 70 basis points to 61.2% when compared to the second quarter of 2019. On an adjusted basis, operating expenses as a percentage of revenue improved 30 basis points when compared to the second quarter of 2019.^(b)
• Operating expenses included $12 million of costs specifically attributable to the Company's People First responses to COVID-19, primarily related to enhanced personal protective equipment and the Company's policies of excusing COVID-19 related absences and guaranteeing 40 hours of weekly pay for full-time employees during the pandemic.
• SG&A expenses were 10.6% of revenue in the second quarter of 2020 compared to 9.9% in the second quarter of 2019. On an adjusted basis, SG&A expenses were 9.9% of revenue in the second quarter of 2020 compared to 9.8% in the second quarter of 2019. ^(b) Increased bad debt expense drove the majority of the increase as efforts to reduce discretionary spending and lower incentive compensation accruals reduced overall costs.
• SG&A expenses included $8 million of costs specifically attributable to the Company's People First responses to COVID-19, primarily driven by employee pay guarantees and costs related to employees working from home.

Profitability

• Total Company operating EBITDA was $941 million, or 26.4% as a percentage of revenue for the second quarter of 2020.^(c) On an adjusted basis, total Company operating EBITDA was $1.03 billion, or 28.8% as a percentage of revenue for the second quarter of 2020 versus adjusted operating EBITDA of $1.13 billion and 28.7% as a percentage of revenue in 2019.^(b)
• Operating EBITDA in the Company's collection and disposal business, adjusted on the same basis as total Company operating EBITDA, was $1.14 billion for the second quarter of 2020, compared to $1.31 billion for the second quarter of 2019.
• The Company grew operating EBITDA in its recycling business by almost $8 million when compared to the second quarter of 2019 by reducing costs and continuing to implement its fee-for-service model.

Free Cash Flow & Capital Allocation

• In the second quarter of 2020, net cash provided by operating activities was $856 million compared to $1.01 billion in the second quarter of 2019.
• In the second quarter of 2020, capital expenditures were $436 million compared to $578 million in the second quarter of 2019.
• In the second quarter of 2020, free cash flow was $423 million compared to $440 million in the second quarter of 2019.^(b)
• The Company paid $230 million of dividends to shareholders.
• As a prudent step to preserve cash in this uncertain environment, the Company has temporarily suspended share repurchases through the end of the year.

UPDATE ON 2020 OUTLOOK^(e)

• Total revenue for 2020 is expected to decline between 4% and 5% when compared to full year 2019.
• Given the strong performance in the second quarter of 2020 and improved volume outlook, the Company now expects adjusted operating EBITDA margin to be in the range of 28.0% to 28.5%, or flat to down 50 basis points on a year-over-year basis.^(b)
• Capital expenditures are projected to be between $1.55 and $1.65 billion, and the Company expects to generate free cash flow approaching $2 billion, exclusive of transaction and advisory costs incurred for the acquisition of Advanced Disposal.^(b)

Fish concluded, "Despite the challenging backdrop, we're confident in our ability to continue to meet our commitments to our customers and deliver solid 2020 results. During these unprecedented times, our business model has once again proven its resilience, and we remain focused on using this opportunity and our technology investments to create a differentiated customer experience that puts our customers at the center of everything we do and to increase work place flexibility for our people."

The Company will host a conference call at 10 a.m. (Eastern) today to discuss the second quarter results. Information contained within this press release will be referenced and should be considered in conjunction with the call.

The conference call will be webcast live from the Investors section of Waste Management's website www.wm.com. To access the conference call by telephone, please dial (877) 710-6139 approximately 10 minutes prior to the scheduled start of the call. If you are calling from outside of the United States or Canada, please dial (706) 643-7398. Please utilize conference ID number 9164328 when prompted by the conference call operator.

A replay of the conference call will be available on the Company's website www.wm.com and by telephone from approximately 1:00 PM (Eastern) today through 5:00 PM (Eastern) on Thursday, August 13, 2020. To access the replay telephonically, please dial (855) 859-2056, or from outside of the United States or Canada dial (404) 537-3406 and use the replay conference ID number 9164328.

ABOUT WASTE MANAGEMENT

Waste Management, based in Houston, Texas, is the leading provider of comprehensive waste management environmental services in North America. Through its subsidiaries, the Company provides collection, transfer, disposal services, and recycling and resource recovery. It is also a leading developer, operator and owner of landfill gas-to-energy facilities in the United States. The Company's customers include residential, commercial, industrial, and municipal customers throughout North America. To learn more information about Waste Management, visit www.wm.com.

FORWARD-LOOKING STATEMENTS

The Company, from time to time, provides estimates of financial and other data, comments on expectations relating to future periods and makes statements of opinion, view or belief about current and future events. This press release contains a number of such forward-looking statements, including but not limited to, all statements under the heading "Update on 2020 Outlook" and all statements regarding future performance or financial results of our business; responses and impacts of COVID-19; future liquidity, leverage ratio and balance sheet strength; future share repurchases; and the pending acquisition of Advanced Disposal Services, Inc. and divestitures to GFL Environmental (together, the "Pending Transactions") including timing of such closings. You should view these statements with caution. They are based on the facts and circumstances known to the Company as of the date the statements are made. These forward-looking statements are subject to risks and uncertainties thatcould cause actual results to be materially different from those set forth in such forward-looking statements, including but not limited to, increased competition; pricing actions; failure to implement our optimization, growth, and cost savings initiatives and overall business strategy; failure to identify acquisition targets and negotiate attractive terms; failure to consummate or integrate acquisitions; failure to obtain the results anticipated from acquisitions; the effects that the announcement of the Pending Transactions may have on the respective businesses; inability to obtain required regulatory or governmental approvals for the Pending Transactions or to obtain such approvals on satisfactory conditions; inability to obtain approval from the stockholders of Advanced Disposal Services, Inc. or satisfy other closing conditions for the Pending Transactions; inability of a party to obtain financing necessary for the Pending Transactions; the occurrence of any event, change or other circumstance that couldgive rise to the termination of a Pending Transaction and the effects of any such termination; legal proceedings that may be instituted related to a Pending Transaction; unexpected costs, charges or expenses resulting from a Pending Transaction; failure to successfully integrate the acquisition of Advanced Disposal Services, Inc., realize anticipated synergies or obtain the results anticipated from such acquisition; environmental and other regulations, including developments related to emerging contaminants and renewable fuel; commodity price fluctuations; international trade restrictions; weakness in general economic conditions and capital markets; public health risk and other impacts of COVID-19 or similar pandemic conditions, including increased costs, social and commercial disruption, service reductions and other adverse effects on our business, financial condition, results of operations and cash flows; failure to obtain and maintain necessary permits; disposal alternatives and waste diversion; declining waste volumes; failure to develop and protect new technology; failure of technology to perform as expected, including implementation of a new enterprise resource planning system; failure to prevent, detect and address cybersecurity incidents or comply with privacy regulations; significant environmental or other incidents resulting in liabilities and brand damage; significant storms and destructive events influenced by climate change; labor disruptions; impairment charges; and negative outcomes of litigation or governmental proceedings. Please also see the Company's filings with the SEC, including Part I, Item 1A of the Company's most recently filed Annual Report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q, for additional information regarding these and other risks and uncertainties applicable to its business. The Company assumes no obligation to update any forward-looking statement, including financial estimates and forecasts, whether as a result of future events, circumstances or developments or otherwise.

NON-GAAP FINANCIAL MEASURES

To supplement its financial information, the Company has presented, and/or may discuss on the conference call, adjusted earnings per diluted share, adjusted net income, adjusted operating expenses, adjusted SG&A expenses, adjusted operating EBITDA, and free cash flow, as well as projections of operating EBITDA margin and free cash flow for 2020. These are non-GAAP financial measures, as defined in Regulation G of the Securities Exchange Act of 1934, as amended. The Company reports its financial results in compliance with GAAP but believes that also discussing non-GAAP measures provides investors with (i) financial measures the Company uses in the management of its business and (ii) additional, meaningful comparisons of current results to prior periods' results by excluding items that the Company does not believe reflect its fundamental business performance and are not representative or indicative of its results of operations.

The Company's non-GAAP results and projections exclude the impact of our planned acquisition of Advanced Disposal Services, Inc. In addition, the Company's projected full year 2020 operating EBITDA margin is anticipated to exclude the effects of other events or circumstances in 2020 that are not representative or indicative of the Company's results of operations. Such excluded items are not currently determinable, but may be significant, such as asset impairments and one-time items, charges, gains or losses from divestitures or litigation, and other items. Due to the uncertainty of the likelihood, amount and timing of any such items, the Company does not have information available to provide a quantitative reconciliation of such projection to the comparable GAAP measure.

The Company discusses free cash flow, and provide a projection of free cash flow, because the Company believes that it is indicative of its ability to pay its quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay its debt obligations. Free cash flow is not intended to replace "Net cash provided by operating activities," which is the most comparable GAAP measure. The Company believes free cash flow gives investors useful insight into how the Company views its liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that the Company has committed to, such as declared dividend payments and debt service requirements. The Company defines free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets (net of cash divested); this definition may not be comparable to similarly-titled measures reported by other companies.

The quantitative reconciliations of non-GAAP measures to the most comparable GAAP measures are included in the accompanying schedules, with the exception of projected operating EBITDA margin. Non-GAAP measures should not be considered a substitute for financial measures presented in accordance with GAAP.

Waste Management

Web site
www.wm.com

Analysts
Ed Egl
713.265.1656
eegl@wm.com

Media
Janette Micelli
602.579.6152
jmicelli@wm.com

Source: Waste Management, Inc.