Finding a Way

Chris Carlson ([email protected])

Like many industries, the solid waste industry has felt the lingering impacts of the struggling economy, volatile commodities markets and a tightening credit market. However, officials and financial analysts say the solid waste industry is better positioned than others to endure these tough times.

"The solid waste industry has a very stable business model," says Brian Butler, a solid waste industry analyst for FBR Capital Markets, Arlington, Va. "It's not a discretionary spend. You've got to have someone pick up the trash."

During the past year, Butler adds, while the S&P Index has fallen 36 percent, waste industry stocks as a whole have seen an approximately 17 percent decrease. "They've held up pretty well," he says. Perhaps more indicative of the industry's investment stability is that while the S&P Index has fallen 17 percent over the past four years, the waste industry has actually gained 10 percent.

However, those numbers do not mean the industry does not feel the impact of a struggling economy. Bruce Parker, president and CEO of the Washington-based National Solid Wastes Management Association, says the industry is more "recession resilient" than "recession proof." He points out that declines in housing and commercial construction have resulted in decreasing waste volumes for haulers. Declining volumes, he says, leave many companies searching for ways to offset those losses in revenue.

Overall, Butler says, the biggest risk or fear for waste companies is pricing discipline. Declining prices would be much more impactful than anything else on the industry's overall business model, he adds, and says declining volumes over the past few years might cause companies to drop their pricing, which is a major concern for investors. However, Butler thinks the pricing will remain stable despite volume drops. "Usually, a drop in volume means a drop in pricing," he says. "But the waste industry is slightly different [from other industries] because of the large ownership of landfills by large public companies."

Houston-based Waste Management, in fact, saw its third-quarter 2008 net income increase 12 percent when compared to the same quarter in 2007, despite declining trash volumes. The company credits the increase in part to increasing prices for certain services and fuel surcharges. "One thing that we demonstrated, as you've seen volumes decline, we've done a really good job of flexing down our costs," said Larry O'Donnell, president and chief operating officer of Waste Management, during a recent conference call to announce the company's third-quarter earnings.

Some of the tools used to offset revenue loss due to decreasing volumes and volatile commodities prices have been environmental and fuel surcharges, and stable controls on disposal pricing. According to Waste Management, its fuel costs for third-quarter 2008 rose on average about $1.45 per gallon, or 50 percent compared to the same quarter in 2007. That increase led to a total increase of $83 million in fuel costs, but O'Donnell says that cost was fully offset by the surcharge.

While Folsom, Calif.-based Waste Connections uses a fuel surcharge in some markets, it also has found other ways to offset rising fuel costs. The company decided to take advantage of recently falling fuel prices and strike a deal with its supplier to meet 75 percent of its 2009 expected diesel needs at $3.75 per gallon. It also has reached agreements to secure fuel for portions of 2010.

"We found that surcharges have a lower recovery rate," says Worthing Jackman, executive vice president and chief financial officer of Waste Connections, who adds that savings using both methods equaled 1.9 percent of the company's overall growth for third-quarter 2008 — meaning the company recovered roughly 60 percent of the increase in fuel cost over that period.