Wait, Why Waste Waste?
One person's trash is another person's treasure…
‘Twas the night before Christmas, and all through the house, not a creature was stirring, not even a mouse. Little Johnny hears a noise and jumps awake– is it Santa in his sleigh coming to deliver presents? He pulls aside his curtains and peers outside. No, it is not Santa you see, little man, it is the big green Waste Management truck driving through your neighborhood on its weekly route, collecting recyclable materials and other waste!
Despite little Johnny’s disappointment, Waste Management (publicly traded on NYSE as “WM”) fulfills an important – and often unloved and unnoticed – function for our society. It is one of the two largest companies in North America managing the removal and processing of waste. The company competes primarily with Republic Services (publicly traded on NYSE as “RSG”); WM generated ~$14B in revenue in the LTM period while RSG generated ~$9.3B[1]. Moreover, WM operates more than 32,000 collection and support vehicles, supporting over 21 million consumer and business customers across the US and Canada[2].
Regulations by various US government agencies over the past decade, in response to a growing awareness of how waste management contributes to Greenhouse Gas (GHG) emissions, continue to challenge WM’s operating model. As an example, WM has traditionally deposited solid waste in one of its 244 landfills, with landfill management subject to certain requirements in the Clean Air Act of 1970[3]. In the past two years, the EPA has been working to finalize new emission guidelines controlling landfill gasses (which emit methane), which will potentially impose additional capital and operating costs on WM going forward[4]. The US government has also issued tighter emission and fuel economy standards on heavy-duty waste collection vehicles, which affect WM’s fleet costs[5].
On balance, WM has responded admirably in revamping some of its operating practices to adapt to changing regulations, addressing cost concerns while developing new revenue streams. Specifically, the company has developed innovative methods to incentivize more recycling by consumers, reduced the GHG footprint of its landfills, and invested heavily in building out a natural gas-fueled fleet. As a result, WM has received several accolades, and the stock price has doubled since 2012. In short, the company is a good example of how investing in sustainability can be beneficial for a community, the environment, and shareholders.
Over the past several years, Waste Management has committed to the motto “Think Green”, and has unveiled numerous operational innovations to support this branding. First, the company has invested in building single-stream recycling facilities, and now ~40% of its 100+ facilities operate this way[6]. Essentially, single-stream recycling allows a person to deposit all recyclables in one bin, without having to separate by material type[7]. This process lowers the barrier to entry for recycling, and given that recycling typically prevents the release of 2.4 tons of C02 into the atmosphere per ton of solid waste recycled, is a positive contributor to reducing emissions from waste processing[8].
WM has also worked to harness its landfills to generate renewable energy. At 130 disposal sites, the company produces over 550 megawatts of electricity, which is used to power nearly 500,000 homes[9]. This amount of energy is enough to offset over 2.2 million tons of coal per year[10]. The company has committed to a goal of generating enough electricity to power 2 million homes by 2020, and currently has the technology to power 1.2 million[11]. This innovation has been another strategic move by the company to support its “Think Green” campaign.
Finally, WM has invested in converting its fleet to natural gas powered vehicles. Currently ~5.1K of the company’s trucks are powered by natural gas, and the company has also built out 84 natural gas fueling stations, 25 of which serve the public[12]. The company committed to reducing fleet C02 emissions by 15% by 2020, and achieved 18% by 2014[13]. This has been an effective move by the company because it has been able to reduce the environmental footprint of its fleet, while mitigating against increasing costs imposed by the government, and also developing a way to monetize the fueling infrastructure it has had to build in order to do so.
To close, WM has responded to greater scrutiny on GHG emissions from the government by adapting their operating model in a way that appears to be sustainable and financially rewarding. Over this same period, the company’s EBITDA margins have increased as it has increased gross margin profitability while cutting costs. That’s not to say that there aren’t additional opportunities for WM to continue focusing on – e.g., having now achieved its 2020 CO2 emissions reductions targets for its fleet, it can continue to scale its natural gas investments and chase more ambitious goals. However, the company has demonstrated a successful commitment to “Think Green”, and hopefully will continue to do so. (796 words.)
[1] Financial information on publicly traded companies, Capital IQ, Inc., a division of Standard & Poor’s.
[2] Waste Management, “JP Morgan Aviation, Transportation, and Industrials Conference Presentation” (March 9th, 2016). http://investors.wm.com/phoenix.zhtml?c=119743&p=irol-calendarPast.
[3] Waste Management, 2015 Annual Report, p.11, http://investors.wm.com/phoenix.zhtml?c=119743&p=irol-reportsannual, accessed November 2016.
[4] Ibid.
[5] Ibid, p. 12
[6] Waste Management, “JP Morgan Aviation, Transportation, and Industrials Conference Presentation” (March 9th, 2016). http://investors.wm.com/phoenix.zhtml?c=119743&p=irol-calendarPast.
[7] Katie Peek, “How It Works: Inside the Machine That Separates Your Recyclables”, Popular Science, August 28th, 2013, http://www.popsci.com/technology/article/2013-07/how-it-works-recycling-machines-separate-junk-type, accessed November 2016.
[8] Ibid.
[9] Waste Management Website, “Renewable Energy”, http://www.wm.com/sustainability/renewable-energy.jsp, accessed November 2016.
[10] Ibid.
[11] Ibid.
[12] Waste Management, “JP Morgan Aviation, Transportation, and Industrials Conference Presentation” (March 9th, 2016). http://investors.wm.com/phoenix.zhtml?c=119743&p=irol-calendarPast.
[13] Waste Management, 2015 Sustainability Report, p. 7, http://www.wm.com/thinkgreen/pdfs/2015_Sustainability_Report.pdf, accessed November 2016.
At some point human technology will progress to the point where robots can dig through landfills searching for valuable materials to recycle. Because of this eventuality, we should not worry at all about trash and recycling since in the future this will be seen as a valuable resource and we are therefore helping our grandchildren. Does this author not care about their grandchildren?
Kalumet – I was curious if Waste Management provided numbers on the amount of recycling processed via its single-stream recycling facilities? Is this process capturing recycling from those who previously would not have recycled or from those who would have anyway? I had read an article that this form of recycling increases the rate of “residuals” – that is, “would-be recyclables that end up in landfills” due to the breaking of glass and other forms of contamination in the single-stream process. [1] If Waste Management is capturing “new” recycling, then these facilities are a great benefit to the environment. If the company is capturing garbage, which would have been recycled anyway, then the benefit of these facilities may be moot. Perhaps, Waste Management can seek to quantify this number in the future!
[1] The Atlantic, “Single-Stream Recycling is Easier for Consumers, but is it Better?,” http://www.theatlantic.com/technology/archive/2014/09/single-stream-recycling-is-easier-for-consumers-but-is-it-better/380368/, accessed November 7, 2016.
Kalumet,
Thanks for this posting and background on WM’s efforts. I can tell you from personal experience that the waste industry absolutely hates recycling. They don’t do it by choice, they do it because they are required to, generally by local regulation. In fact most waste businesses will tell you that recycling is actually environmentally inefficient in many instances, especially glass. Even WM’s CEO, David P. Steiner, stated in one article that “there’s a crisis to confront” if we unquestioningly believe that recycling is great for the planet [1]. Also, the hauling fleet conversion to natural gas really was a play on energy prices, not environmental sustainability. Lastly, these landfills naturally produce methane gas as the waste decomposes. Many landfills actually flair their methane rather than sell it because it can be so dirty that the costs and cleaning required to make it salable do not make the economics worth the trouble.
[1] https://www.bustle.com/articles/125641-is-recycling-worth-it-the-answer-might-surprise-you