Strong Q3 results exceed Wall Street
WM positioned to achieve full-year financial
HOUSTON – When WM announced its Q3 earnings on October 29, there was a lot to boast about.
Despite continued challenges posed by the recycling side of the business, as well as higher operational
expenses, revenue climbed 4.6 percent, free cash flow reached $452 million and sales, general and
administrative costs (SG&A), a major determinant of the company’s spending, dropped to its lowest
level as a percentage of revenue since 2005.
In addition, Waste Management saw major improvements in yield, which is a key performance indicator
for pricing. For collection and disposal, internal revenue growth from yield rose to 2.3 percent – nearly
three times higher than a year ago when it was at .8 percent.
Overall, it was a strong quarter that puts the company on strong footing toward reaching its 2013 targets.
Here are the highlights:
- Revenue rose 4.6 percent year-over-year (YOY), or $160 million, due primarily to acquisitions
and better yield
- SG&A improved as a percentage of revenue despite $50 million in accruals to fund WM’s
annual incentive plan
- Free cash flow rose to $452 million compared to $180 million the prior year
- Operating expenses increased $96 million
- Recycling operations negatively affected earnings by $.02 cents, or roughly $14 million
- Earnings per share (EPS) was $0.65, which beat Wall Street’s consensus by $0.03
- $171 million was returned to shareholders in the form of dividends
“We are pleased with our results for the third quarter,” said David Steiner, president and CEO of Waste Management.
“At the beginning of the year, we said we would get back to basics by focusing on yield and cost controls. Our
corporate and field managers have done just that and have done it very well.”
Income & Costs
With solid performances in yield, SG&A cost controls and disciplined capital spending, Waste Management more than
made up for the increased operating expenses it faced, as well as the negative impact from our recycling business.
When it came to operating expenses, many things contributed to a $97 million increase. Costs related to the Greenstar
acquisition — made earlier this year — led to a $37 million increase, while labor and related benefits rose $32 million.
The majority of the remaining costs were related to other recycling expenses, as well as the timing of repairs and
maintenance at some of the company’s waste-to-energy facilities.
Also on the cost side is SG&A, which improved as a percentage of revenue despite an overall monetary increase of $17
million. This increase was due to $50 million in accruals that will be used to fund the company’s annual incentive plan.
Without the accrual, SG&A would have improved $33 million.
A key outcome of this was higher free cash flow, which rose to $452 million. Not only was this a major increase when
compared to the prior year ($272 million improvement
YOY), it also allows the company to use those additional funds several ways, from purchasing new trucks to returning
value to shareholders.
“We’re getting a hand on our expenses,” said Jim Fish, chief financial officer for Waste Management. “Cost control
efforts and programs like Service Delivery Optimization are helping to do that.”
Since the beginning of the year, Waste Management has faced several challenges from the recycling side of the
business, the most evident of which are lower commodity prices and the “Green Fence,” an industry term describing
quality standards being imposed by China.
There are no quick, easy solutions to these challenges, so the company is taking a variety of steps to increase earnings
and decrease volatility. This includes developing new processes at its sorting facilities to lower contamination rates,
educating customers on what can and can’t be recycled, and reworking recycling contracts to protect WM against
Efforts to address each of these issues are taking place today, but the company does not expect its recycling business to
improve overnight. Rather, it’s going to take some effort throughout the remainder of 2013 and into 2014. Once commodity
prices do improve, and the processes for reducing contamination begin to take hold, WM will be in a good position to turn
the corner on recycling.
By the end of 2013, according to Fish, the company is projecting internal revenue growth from yield to be between 1.5 and
2 percent, which is a big improvement when compared to the prior year. Free cash flow is expected to be between $1.2 and
$1.3 billion, which is $100 million above previous expectations. Lastly, the company expects to spend between $1.3 and $1.4
billion in capital expenditures for things like new trucks, equipment and transformation programs.
“Despite some headwinds, the results of the first nine months of 2013 have put us in a position to achieve or exceed our
goals,” Fish said. “We thank all of our employees who have worked hard to get these excellent results.”