Waste giant’s earnings hurt by recycling
Waste Management concentrates on higher-margin lines of business as it casts off unprofitable contracts
Recycling continues to affect Waste Management’s bottom line, as low oil and commodity prices have made that a challenging business.
Recycling continues to hurt Waste Management’s bottom line, as low oil prices and low commodity prices have made that a challenging business for at least the past year.
The Houston company on Thursday reported a decline in revenue and earnings for its fourth quarter and full year in 2015, as it sheds some unprofitable recycling contracts and works to expand higher- margin business. Net income in the fourth quarter was $273 million, down from $590 million in 2014, and earnings per share dropped to 61 cents, from $1.29 a year earlier.
“The business is firing on all cylinders, save two areas: recycling and environmental services,” CEO David Steiner said during a call with investors.
Considering the challenges in recycling, Stifel analyst Michael E. Hoffman gave the company good marks for the quarter and Waste Management’s 2016 outlook.
Volume growth in municipal solid waste, construction and demolition waste and overall landfill helped as commodity prices hit lows not seen since the 2009 recession. The parts of the business that are growing have better margins and were helped by higher prices last year, the company said.
“We look for volumes when we can make money on those volumes. We don’t look for volumes for the sake of volumes,” Steiner said, addressing why recycling volume the company
handles has declined.
“We’re adding volume in the high-margin areas,” he added.
Steiner said commodity prices were 23 percent lower in January than a year ago, when prices were already a problem for the business.
Revenue from traditional solid waste grew $50 million for the quarter, helped by increases in volume and prices. Acquisitions added another $59 million in quarterly revenue.
Meanwhile divestitures led to a $163 million decline in revenue, and recycling brought down revenue by $34 million in the fourth quarter.
Waste Management has been coping with tough times for residential recycling that spread across the industry. In many cases the company is no longer able to cover the costs of collecting and processing paper, cans and plastic bottles with the revenue it gets from selling them.
In paper, “if they can improve their processing costs per ton, you survive,” Hoffman said. But slower economic growth in China has contributed to lower prices for recycled metals, while the low price of oil makes virgin plastic cheaper to produce than using recycled plastic.
“It’s just very hard to cover your cost of processing,” Hoffman said.
Glass causes problems for waste companies by damaging sorting ma- chines while it’s sold at very low prices, and consumer confusion over what to put in recycling bins makes recycling more expensive. Companies spend money removing non-recyclables from the stream, and contamination reduces the quality, and therefore price, of the recyclables they sell from collection.
Waste Management cut its recycling expenses by 15 percent from a year ago, Steiner said, and is working to renegotiate municipal contracts so that it doesn’t shoulder all of the costs of recycling when it’s operating at a loss. Already it has renegotiated 75 to 80 percent of its contracts, Steiner said.
But a model that works in these economic conditions will likely mean fees for consumers, requiring a new mind-set about recycling. Where Waste Management can’t cover its costs, it has shed some of these contracts. It has also consolidated, ending the year with 104 sorting facilities, down from 126 the year before.
“Everybody’s recycling business is getting smaller for all the same reasons,” Hoffman said.
For the full year Waste Management saw $753 million in net income, down from $1.3 billion in 2014. Earnings per share for the year were $1.66, compared to $2.80 a year ago.
But Waste Management said it is not abandoning the recycling business.
“We’re committed to recycling, and we’ll continue to work to change the busi- ness model to generate revenue that covers our processing costs and drive out operating expenses so that the business is sustainable over the long term,” Steiner told investors.
In recent years, coming off high commodity prices, companies signed optimistic contracts with municipalities that share profits between the company and municipality, but leave the company with the risk of revenue not covering costs.
“Recycling was built on the backs of wishful thinking in a period of irrationally high, unsustainable pricing, and an abbreviated view or how to educate the public on how to recycle in that there wasn’t a legitimate conversation about what is truly recyclable, versus, ‘I’m going to give you two bins,’ ” Hoffman said.
Consumers and municipalities will likely be rethinking recycling soon, how much they value it and if they’re willing to pay for it.
“We want to see recycling thrive because it’s the right thing for our environment, and it’s the right thing for our customers,” chief financial officer Jim Fish said during the call. “We just want to make sure it’s the right thing for our shareholders.”
He added that recycling did not take the hit on earnings per share that the company expected, bringing it down by 4 cents, versus the 8 to 10 cents Waste Management had predicted.