Is Commercial Waste the Next Frontier for Industry Volume Growth?

When Waste Management Inc. released its second quarter results last week and highlighted positive commercial growth for the first time since 2005, David Steiner president and CEO, attributed the increase to execution by the company to grow that volume and sustain pricing.

While some in the industry suspect that volume increases, particularly in commercial waste, are trending throughout the industry thanks to a favorable climate for growth, others, like Waste Management, suggest it’s execution of long-term business plans coming to fruition.

On a conference call discussing the quarterly results, Steiner said Waste Management had positive volume growth overall in the second quarter, and commercial volumes, which increased quarter by quarter, were 0.3 percent, an improvement of 50 basis points in the first quarter and a 250 basis point improvement from the second quarter of 2015.

Others in the industry are seeing commercial volume growth, says SWANA CEO and executive director, David Biderman.

"In my conversations with haulers and others at WasteExpo and SWANA events, there is a general theme of an uptick in commercial volume," he says.
While Republic Services saw a 50 basis point decline in commercial volume, the company said the decrease came after not renewing select national accounts and shedding certain work performed through brokers, and were intentional.

However, overall volumes were up for Republic in the second quarter and the outlook appears positive in its commercial business.

“We continue to see the highest level of average yield in our small container commercial business. A majority of these customers are in open markets where we can continue to leverage an increase in demand for service, our enhanced product offerings and our digital platform,” said Republic Services CEO, Don Slager in a Thursday conference call on second quarter results.

The company continued to get a strong price on small container commercial business for the quarter of 3.7 percent yield, and added that the underlying fundamentals of the commercial business are strong.

Chaz Miller, director of policy/advocacy for the National Waste & Recycling Association in Washington, D.C., cautions that positive results could be a trend in commercial waste or it could just be something else.

“Even if you hear from publicly traded companies who report, and even if they all say commercial is up that could still either be a trend reflecting the industry as a whole, or they’ve just done better competitively. Either or,” he says.

As far as Waste Management is concerned, the company has worked to add the right volumes while staying aggressive on pricing, says John Morris, senior vice president of field operations.

This key strategy has been in place for some time and includes improved service, he says, not just at the curb but in all customer interactions from billing to the call centers. “And our defection rate has improved.”

Michael E. Hoffman, managing director for Stifel Financial Corp. has written in research notes that most if not all companies should produce 1 percent or better volume growth in 2016. The second quarter results to-date had a range of 4.2 percent to 0.5 percent with a view to the second half being better than first half of the year. Solid waste is on track to an average 2 percent year-over-year volume trend in the next 18 months with some companies generating better volume than others.

Waste Management has been vocal about pricing for some time, says Morris, and still, volume is increasing.

“We’ve been aggressive on pricing because that pie has not been growing. And we’ve been of the mind that being aggressive on price and shedding some volume has been a better business decision over the last decade or so.”

Morris says volumes have grown steadily over the last eight to 10 quarters, even as the company has maintained its discipline around pricing—particularly in the small container business.

“We’re obviously seeing improved sales results,” says Morris. “We’ve talked a lot about where we’re focusing our new sales force and more than half of our new business sales are coming from green field sites. We think we’re being pretty effective at beating the competition to the punch, if you will, in terms of getting out in front of those new small container businesses.”

Increased volume is the result.

“Although not a huge number, it’s a huge improvement. I think what’s made us all more comfortable is that steady quarter in and quarter out improvement. It’s not that we’ve swung the pendulum away from pricing. We tested that theory four years ago and it didn’t work out so well for us. So what we’re seeing is kind of a steady march to positive traditional waste volumes and now for the first time in a long time that commercial, small container business crossed over to positive territory. And we did it without conceding our pricing discipline.”

While Morris says he’s not studied the recently released results of others in the industry, he can confirm that Waste Management has strategically targeted growth.

“We have been very cautious but disciplined about trying to get positive growth on the commercial side,” he says. “And when you look at some of the metrics around service increases and some of the indicators that we look at, we’re not seeing any softening in those indicators. So we’re feeling pretty good that going forward that trend we’ve been on for eight or 10 quarters is on solid footing.”

The commercial line of business is a high-margin business for Waste Management. The waste put on Waste Management trucks, ends up in its landfills—an integration benefit when valuing business, Morris says.

“I don’t want to speculate on what others are doing. I do think though our best barometer is we’re still able to achieve and exceed our pricing targets and grow volume, which tells me that there’s a healthier environment in commercial business right now than there has been.”

Consumer spending is still strong, he says, which also is contributing to commercial growth.

Assuming those same indicators are present for others, the trend could be positive for commercial volumes for the industry.