Waste Management rose to prominence as a simple trash hauler, but the Houston-based company has broadened its portfolio considerably in recent years under David Steiner. The CEO is less interested in dumping garbage than in plumbing it for items that can be recycled, burned for energy or decomposed to create methane gas. “Waste Management is transforming into a materials company,” Steiner says.
That doesn’t mean there isn’t any value in the trash business. Commodity prices tanked during the past year, hurting Waste Management’s recycling business, at least for the time being. The legacy garbage business, however, which still accounts for 83 percent of the company’s revenue, remains recession-resistant. “We’re like a utility,” explains Steiner, a lawyer by training who has quickly risen through the ranks at Waste Management since joining in November 2000 as deputy general counsel. “Even in a bad economy, this is one of the bills you pay.”
Recession-resistant is not recession-proof, of course. When construction slows to a crawl, so-called roll-off contracts — the Dumpster business — slow down too. Until recently, Waste Management could compensate for lower volume by raising prices. But by the end of last year, price hikes could no longer completely make up for plunging volumes, and roll-off profits dropped. Waste Management says that in 2008 it earned a total of $1.09 billion on revenue of $13.39 billion, compared with earnings of $1.26 billion on revenue of $13.31 billion in 2007. Its stock, which closed at $27.65 per share on May 28, is down about 30 percent from its 52-week high of $39.25 in June 2008.
Hauling trash and managing landfills are saving Waste Management’s bottom line right now, but Steiner’s eyes remain focused on reuse rather than disposal. In a conversation with Institutional Investor Contributing Writer Claudia Deutsch, he elaborated on the company’s plans to morph from a domestic trash hauler into a global materials behemoth.
Institutional Investor: I’d think that, in a turbulent economy, investors would view the trash business as a true safe harbor.
So why has your stock fallen?
Steiner: We’re the safest port in the storm, but when the storm is this big, there is no fully safe harbor. Just look at the huge fourth-quarter hit we took on recycled commodities. Our most plentiful commodity is cardboard, and our biggest customer is China. In the fall demand from China fell off a cliff. We first thought it would cause a 3-cent hit for the quarter; within a month we realized it would be an 8-cents-a-share hit.
So why didn’t more investors flee?
In this kind of market, people want companies with solid cash flow. And we still think we can generate $1.4 billion or $1.5 billion in free cash this year. That’s about the same as we generated last year — and not that many companies will be flat on cash in 2009.
In addition, our dividend yield is above 4 percent. We’ve refinanced $800 million in debt that was coming due this year, so we now have no debt maturing until 2010. The board will make the final decision, of course, but I feel pretty safe saying our dividend is sacrosanct.
In 2008 you made an unsuccessful attempt to buy Republic Services, another trash hauler, for $6.7 billion. Was losing Republic a big blow?
Republic was the best deal we never did. It would have added trash-hauling routes that tucked in nicely to ours, and we thought it would be accretive to earnings in year one. But the deal would have added a huge amount of leverage to our balance sheet. Instead, we were able to go into 2009 and pay our dividend and buy back our own stock at a low price.
We have a triple-B credit rating, which means we could probably get a billion dollars or so in financing if we want to buy something. But we’re not looking for billion-dollar acquisitions, just for small tuck-in businesses that we could probably fund out of free cash.
You had planned to combine geographic divisions and cut many jobs as part of the integration of Republic. You went ahead with the plan even after the deal fell apart in September. Why?
The economic downturn had begun, and the reorganization helped us cut costs. We had 45 geographic market areas, each with its own sales and administrative staffs. We consolidated them into 25, saving millions on duplicate sales, human resources and other functions. And with only 25 market areas, we didn’t need as many accountants or information technology specialists at headquarters. We made cuts to the corporate office that will eventually save us $100 million a year.
With Republic out of the picture, you probably need to build more landfills to get revenue growth. Won’t you run into Not in My Backyard (Nimby) syndrome?
Oh, the problem has gone well beyond Nimby. Our industry suffers from Banana syndrome — Build Absolutely Nothing Anywhere Near Anyone.
But we’re steadily dispelling the myth that landfills are smelly and dangerous. We’ve held open houses at landfills around the country, and people have been stunned by what they’ve seen. These days we actually have communities asking us to put in landfills. They know we can provide a big part of their budget.
Aside from landfills, what other trash-related businesses do you find attractive?
We want to get bigger in waste-to-energy programs and in electronics recycling. We certainly want to grow in medical waste. We don’t expect to unseat Stericycle as the leader in that market, but there’s no reason we shouldn’t be a clear second. And we’re looking at better ways to use the organic waste that accumulates in gardens and yards. Maybe it should be burned for energy. Maybe we should use it instead of dirt to cover our landfills.
There’s a lot of opportunity in the green movement. California already requires that half its waste be recycled, and that kind of concern is spreading across the country. The guy who runs our Southern group used to shrug recycling off as “West Coast stuff.” Now he says that sustainability is the top concern in Tupelo [Mississippi] too.
Every example you’ve given is domestic. Are you interested in global expansion?
In the late ’90s, Waste Management had to sell all of its overseas trash-hauling businesses to pay down debt. I want to get back into the overseas market, but not with trucks hauling trash. I want to set up plants that convert municipal waste to electricity. It’s a good business model. The waste-to-energy business accounts for only 6.6 percent of our revenue but 14.5 percent of income from operations. And it fits in with the global interest in treating waste in an environmentally sensitive manner. We want a foothold in places like China.
Back in the ’70s, many companies pursued technologies for turning waste into energy because it represented a cheap, infinitely renewable source of power. Is being green the main selling point today?
It’s rarely an either/or situation. Waste-to-energy plants are expensive to build and manage. They make economic sense in places where the electricity rates are high and where the cost to dump waste in a landfill is at least $100 a ton. In other places, where the economics aren’t as clear, environmental reasons might be the main factor.
But usually, both factors weigh in. Look what happens when you derive energy from landfills. Decomposing waste gives off methane, a potent greenhouse gas if it escapes but a potent source of energy if it’s captured. We run 290 landfills in the U.S., and we are siphoning methane from half of them.
I imagine that your customers are equally zealous about reusing or repurposing materials. Inevitably, they’ll generate less waste.
Won’t that hurt you in the long run?
We’ve decided to swim with that tide, not against it. We have what we call our Green Squad, which audits a customer’s waste stream and offers tips on reducing it. That’s a free service. But we also have a group called Upstream. Customers pay that group to manage their materials flow in ways that cut down waste.
And we partner with customers. We’ll look at their waste stream and say: “Hey, you’re paying $1,000 to get your trash hauled away.Maybe we can make $1,200 by recycling it.” We’ll split the profits with them. Local entrepreneurs often cut deals like that, but we’re one of the few large companies in our industry that is thinking along these lines.
