Run Silent, Run Deep

Michael Fickes

Although it is the second-largest company in the waste industry, Allied Waste Industries, Scottsdale, Ariz., typically remains fairly tight-lipped about its operations. Sure, the company reports earnings and acquisitions as typical of publicly traded companies. But the unassuming giant also is happy to move about like a blip on the radar screen, focusing on its business rather than public relations.

When put to task, however, Chairman and CEO Thomas H. Van Weelden will share opinions on running a top-notch trash company. First, build an infrastructure capable of transforming the work of collecting and disposing of trash into profits, he says. Second, provide experienced field management with the latitude to make decisions about collections, transfer, landfilling and recycling. These relatively simple ideas — vertical integration and decentralized management as Van Weelden calls them — rely on creating conditions that enable experienced people to do their best.

Proof that the strategy works is evident in Allied's bottom-line. After 10 years at the helm, Van Weelden has built a company that earned $5.6 billion in revenues in 2001. More to the point, Allied generated $1.9 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA). As a percentage of revenue, the $1.9 billion EBITDA translates into an operating margin of 34.7 percent, the highest in the industry, Van Weelden says.

Of course the recession has put a damper on business everywhere. In Allied's case, New York-based Morgan Stanley estimates that 2002 revenue likely will decline by approximately $100 million. Nevertheless EBITDA will remain relatively strong at 31.8 percent to enable the company to pay off more than $300 million of the company's $9 billion in debt, Van Weelden says. If the forecast holds true, Allied will enter 2003 owing $8.9 billion.

Large debt normally makes investors nervous. And with an 80 percent debt-to-capital ratio — 30 percent higher than what analysts consider optimal — Allied's figure is noteworthy. Nevertheless, the company largely incurred the debt through its $9 billion acquisition of Browning-Ferris Industries (BFI) in 1999. So instead of being a liability, the acquisition represents a confident execution of the company's business strategy, Van Weelden says.

“Vertical integration gives you better control of cash flow,” he notes. “When you put money into developing a landfill, you want to be sure that the garbage shows up. If it does, you have a sustainable business.”

BFI's Effect

This is the strategy that led Allied to acquire BFI. Prior to 1999, Allied's internalization rate, the percentage of company-collected trash disposed of in company-owned facilities, stood at a solid 72 percent. When Allied acquired BFI, the rate dropped to 57 percent. Van Weelden's goal, however, always has been to raise internalization to 70 percent. And with Allied's continual integration of BFI operations, the rate has increased to its current 67 percent.

The BFI acquisition has since more than doubled Allied's assets, which now include 343 collection companies, 174 transfer stations, 168 landfills and 65 recycling facilities.

But how to manage a consolidated company profitably?

When Allied inherited BFI, the company had to meld two distinct management styles. BFI used a highly centralized system with silos. Working within a silo, a BFI sales manager reported up to a district sales manager to a regional sales manager and so on. Likewise, managers in other disciplines reported up through separate silos. No one at the local or even district level held responsibilities for overall business performance, says Donald W. Slager, Allied's senior vice president of operations. “We changed that immediately,” he says.

The current Allied structure places overall business responsibilities on people at every level, from local managers reporting to district managers up through regional and area managers. Prior to the acquisition, Allied traditionally divided the country into two areas, eight regions and 45 districts. This was effective for a $3 billion company, Slager says, but the structure needed to be expanded for the $5.7 billion Allied-BFI combination. “Individuals had too much geography,” he says. “Regional vice presidents were covering five states when they should have been covering two.”

Allied has since remedied this by expanding its management structure to include four areas, 12 regions and 58 districts, a process that began in late 2001 and concluded in the third quarter of 2002. “Long-term growth requires the right combination of assets and people,” Van Weelden says. “The regional expansion put our best garbage men closer to our customer base.”

Latitude To Be Local

Ensuring employees are in touch with Allied's customers is another key to the company's success, according to Van Weelden. “This is a local business,” he explains. “You do things differently from California to Texas to Florida. So you have to put the right people in the right jobs and give them latitude in making day-to-day decisions that affect their employees and customers.”

In fact, Allied's top brass look at the waste business through experience gained at the local level. They all believe fervently in giving local managers the freedom to do what they do best. The company also prides itself on the fact that most of the top executives have worked in the waste industry for at least 25 years and have physically thrown trash for a living. Van Weelden himself, at age 20, started a hauling company of his own. At age 47, this is what has given him the knowledge of what works at the local level and the experience to run one of the top waste companies in the world, Van Weelden says.

The approach seems to encourage employees, too. Two years ago, for example, Dan Gorske, a 20-year waste industry veteran, was an Allied district manager in suburban Chicago. In the past 18 months, Gorske has renewed 19 contracts, won five new contracts and lost only one piece of business. His reward was a promotion to regional vice president, an expanded management position that still maintains field responsibilities.

“We don't have a lot of people in the corporate office who make day-to-day operating decisions,” Van Weelden says. “Most [of the executives headquartered in Scottsdale] work to support the field by creating resources” so that field employees can make the best local management decisions.

This mentality filters through to Allied's procurement department, which negotiates prices with vendors and distributes information about the best prices over the company's internal web connection, but never mandates particular product purchases. “We do this legwork, but we don't mandate quantities or specifications,” Slager says. “The people in the field make the ultimate decisions.”

By providing field managers with decision-making latitude, Van Weelden has found an economical way to manage the overall company. In 2001, for example, Allied reported sales, general and administrative (SG&A) costs of $439 million, or about 7.5 percent of revenues — the lowest in the industry, the company says.

Van Weelden streamlines headquarters costs but spends where necessary in the field. For many years, spending in the field meant acquiring companies. In 1992, when Van Weelden and two key executives (Rich Van Hattem and Roger Ramsey) joined Allied, the company was producing $35 million in revenues. Between 1992 and 1999, they acquired operating companies, doubling Allied's size every year through its largest acquisition of BFI.

The Future of Acquisitions

Since 1999, Allied's acquisition strategy has slowed but not stopped. “Today, we look for infrastructure assets like transfer stations and landfills that fit our strategy,” Van Weelden says. “We'll look at operating companies that have been in business for a long time, but not startups. When you acquire an operating company, you are buying a customer base and goodwill. Startups don't have that.”

Allied will continue to seek well-placed acquisitions capable of improving internalization, Van Weelden says. At the end of October, for example, the company sold collection operations in Knoxville and Cleveland, Tenn., and Palatine, Ill., for $70 million. Simultaneously, the company announced it was acquiring four landfills and a transfer station for $30 million. “This transaction exemplifies our [integration] strategy,” he says. “We sold assets where we didn't have the ability to internalize waste flow and reinvested the money in assets that will enhance internalization.”

The transaction also illustrates Allied's commitment to funding new acquisitions with funds from divestitures instead of new debt.

Paying Off Debt

“We have a lot of leverage and debt,” Van Weelden admits, “but the waste business generates strong, consistent cash flow and can support a lot of leverage. Right now, our cash flow is going to pay down debt. We've paid off $700 million over the past two years.”

So while $9 billion debt might appear to be a crushing burden, Van Weelden says it represents a way to move forward in an era offering few opportunities to increase revenues and profits through large acquisitions. As debt declines, so do interest payments, he says. Subsequently, lower interest payments push more cash down to bottom-line profits.

“Even in a tough economy when it is tough to get price increases, we're still going to pay down debt and going to produce more net income and drive shareholder value,” Van Weelden adds.

As time passes and BFI's debt comes off the books, Van Weelden says he will strive to create a better waste business — not pursue revenue goals. “Our only goal has always been to run the best waste business on a local basis,” he says. “In doing that, we hope to maintain the discipline of vertical integration and decentralized management. We want to stay true to how we believe the garbage business needs to be run.”

Mike Fickes is Waste Age's business editor.

ALLIED WASTE AT-A-GLANCE

Operations: 343 collection companies, 174 transfer stations, 168 landfills and 65 recycling facilities.

Services and Service Area: Non-hazardous solid waste management in 119 markets in the United States.

No. of Regional Operations: Operations are organized into 4 areas, 12 regions and 58 districts.

No. & Types of Trucks: Approximately 14,000 trucks. Top 5 chassis manufacturers include Ford/Sterling Truck Corp., Willoughby, Ohio; International Truck and Engine Corp., Warrenville, Ill.; Mack Trucks Inc., Allentown, Pa.; Peterbilt Motors Co., Denton, Texas; and Volvo Trucks North America, Greensboro, N.C. Top five body manufacturers include Galbreath Inc., Winamac, Ind.; G&H Manufacturing, Arlington, Texas; Heil Environmental Industries, Chattanooga, Tenn.; Leach Co., Oshkosh, Wis.; and McNeilus Truck & Manufacturing Co., Dodge Center, Minn.

Containers: Commercial — various local vendors; Roll-Off-various local vendors; and Residential — Otto Industries Inc., Charlotte, N.C.; Rehrig Pacific Co., Los Angeles; Schaeffer Systems International Inc., Charlotte, N.C.; and Toter Inc., Statesville, N.C.

No. of Employees: 29,000.

Most Interesting: Allied Waste senior operations management personnel have more than 830 years of combined experience, an average of more than 22 years per person.