Changing the model

In the summer of 2016, James C. Fish Jr. was appointed president of Houston-based Waste Management (WM). He previously served as the company’s chief financial officer. Before the end of the year, Fish had taken on yet another title with WM, that of CEO, and its associated responsibilities. He replaced David Steiner, who served in that position since 2014.

At the time of Fish’s appointment as CEO, Robert Reum, then the nonexecutive chairman of the company’s board, said, “Today’s announcement is the culmination of a succession planning process we started 18 months ago with the support of the entire board. Over the last 15 years at Waste Management, Jim has consistently delivered results and has the skills and leadership qualities that make him ideally suited for the role. He has a deep understanding of our strategy, impressive financial and operational acumen and strong support from employees, customers and investors.”

Fish took on these new roles with the company at a trying time for WM and the recycling industry overall. Secondary commodity markets had been depressed for some time, and WM was feeling the aches and pains related to that depression. The company’s commitment to recycling also was being called into question by some other operators in the industry and by others as well, who were saying WM preferred to landfill material rather than recycle it. Steiner’s comments that recycling was “in crisis” contributed to this opinion.

While Fish acknowledges that WM is the “biggest landfill company in North America,” he is quick to add, “but we are also the biggest recycling company in North America. When we look at our lines of business by return on invested capital (ROIC), recycling, over a period of time, is the second highest ROIC for us, and landfills are not first. From an ROIC standpoint, we would prefer to put every single ton into a recycling facility. We are big proponents of recycling.”

However, municipal recycling contracts that were negotiated when commodity prices were higher contributed to WM’s lackluster performance in this area in recent years.

In an effort to improve the company’s performance in its recycling line of business, Fish says, “I think first and foremost, we felt that we had to change the model a bit.”

That meant renegotiating contracts with municipalities as they came due for renewal. He explains that the average price for commodities WM sold over a period of 10 years had been about $100 per ton. “That average is for a basket of commodities—metal, plastics, cardboard, paper. Our average cost to process the material through the plant had been about $70. That left about $30. They would take $15 in rebates from us, and we would take $15, and that would give us a 15 percent margin, which was a nice margin.”

Fish says that from 2012 through early 2016, however, commodity prices had declined to a low point of roughly $80 per ton in early 2016. During this same time, WM’s processing costs had increased from $70 to $75 per ton to ensure its processed recyclables met China’s quality standards, making this contract model unsustainable. “So, we said, ‘Here’s what we need to do. We need to change the nature of the contract, so when prices are at $100, we can still split that commodity price remainder with the city. But, when prices are down … we are not going to pay you $15 and absorb a $10 or $15 per ton loss. That doesn’t make sense.’”

Fish continues, “We’ve changed a lot of these contracts as they have come due, and some of them have been changed midstream.”

In the Q&A that follows, Fish outlines other changes at WM related to recycling and what the future of this line of business could look like at WM.

RT: When you have modified your recycling contracts with municipalities, what has been their response?

JF: I think they have generally been open. But I’m not going to tell you that we haven’t received some pushback; we have. But we’ve been successful in renegotiating most of these contracts.

It ends up in some cases when commodity prices are low being a negative from a budget standpoint for municipalities. Now, when commodity prices are high, it is somewhat moot for them. But when commodity prices are low, and we are asking them to share the pain, if you will, then it’s different from guaranteeing them $15 irrespective of commodity price. They understand that. They also understand that if you don’t have a recycling business that makes sense, then recycling as a whole could be in jeopardy.

While they don’t like the fact that they now have to bear some risk on the downside, they do understand that recycling is here for the long term. It is good for the environment [and] it’s good for them because their constituents are asking for it.

RT: Was that the primary effort, to change those contracts to better reflect market realities, or did you make investments in processing technology as well?

© Waste Management

The optical sort technology has really improved dramatically, so we continue to put new optical sort equipment in our recycling plants. We have things like a paper magnet … which is basically a small suction stream, and it rotates just like a regular magnet. It sucks the paper away, which is very lightweight, but it does not have enough pull to it to suck pieces of cardboard. It pulls the paper off of the stream. 

We continue to press our OEMs (original equipment manufacturers) to come up with improved recycling equipment, such as robotics. How do we better use robotics? It still is a fairly manual process here in parts—the initial sort line is very manual. I don’t expect that you’ll see labor being eliminated from the recycling business. You’ll still have some manual sort lines within recycling plants, at least for the foreseeable future. But we do continue to look toward automation because, when we have brought automation in and when it is working well, it gives us a higher yield on recycling. I think what you’ll see is that recycling will be a combination of manual and automated processes.

RT: What factors have led to increased recycling costs for the recycling industry? Were any other factors at play for WM in particular?

JF: It is largely two things working on cost. One is typical inflation; you see the cost of equipment going up and, of course, wage inflation, which causes the cost of processing to increase. But the one that I mentioned earlier is really the quality controls that the Chinese have imposed. They called it the Green Fence when they first did it, and that was probably four years ago. Now they have round two that they are putting out (known commonly as National Sword, which was introduced early this year).

Back when they initially imposed the Green Fence on everyone, they gave some examples of how bad the recycled material was that was coming via boat to China, and they were rejecting quite a few loads. Still to this day they have never rejected any WM loads. In fact, we have had employees from some of the Chinese mills in our facilities. We actually had an employee from one of the big mills in China who lives and works in Philadelphia inspecting bales. It is much more cost-effective to have someone inspecting these bales before they put them on a ship and incur the transportation costs.

It is our job to ensure that everything we send out is of the highest possible quality, so we have been doing our own inspections. We send material back through a sort line before it gets baled to ensure it is as clean as possible. We have done a number of things to try to improve the quality, but there is some cost to that, and that is what ultimately contributes to the upward pressure along with ordinary inflation.

We have worked against [those cost increases] with some of our efficiency and productivity metrics that we continue to focus on, both on the collection side of our business but also on the recycling side of the business.

RT: Tell me more about what you’re doing to improve processing at WM material recovery facilities (MRFs)?

JF: The primary steps we’re taking is working with equipment manufacturers and pushing them to come up with new and better technology that improves the yield on the back end. To me that is the single most important driver of profitability ultimately—what does our residual material on the back end look like? We’d love to be able to on a consistent basis over our entire network have residuals sub 10 percent because that means that 90 percent of that material is being truly recycled. It’s one of the things we talk a lot about. It is one of the things that we talk about at our sustainability forum at the Waste Management Phoenix Open. We are in favor of recycling more and not just diverting more. It is something that we have had to work with some of our municipal partners on; there’s a difference between diversion and recycling. Diversion just means the first step away from the curb is not a landfill. But, as an example, if I put 40 percent of my trash in my recycle bin, then most municipalities count that as diversion. Ultimately it doesn’t do the earth any good, because that 40 percent ends up in a landfill anyway. But it costs $75 a ton to process it, plus the cost of disposal.

We are also working with our customer base to make sure they use more recycled materials. Improving the amount of recycled content they use is good for the environment, it’s good for us and ultimately it needs to be good for them. I think that is their big question, some of these companies that use plastic bottles, “Can the price of recycled plastics be an incentive for me as opposed to a disincentive if virgin material is less expensive?”

RT: What role will recycling play in WM’s business model going forward?

JF: It will continue to be a very important line of business for us. I will tell you that I think recycling, particularly if you consider not just traditional paper and plastic but all types of recycling, you’ll see it become a bigger and bigger piece of our overall business going forward.

It is as important to us as a corporation to recycle and to promote recycling. Whether it is traditional single-stream recycling or dual-stream recycling or whether it’s organics recycling and C&D processing, you’ll continue to see that be a very important part of what we do, and it’s a growing part of what we do.

I’d like to see WM in the next decade be the leader—and I think we are the leader, but far and away—in the sustainable space. I think our customers would like to see that. I would look at it as being a differentiator for us.

Jim C. Fish is president and CEO of Houston-based Waste Management. More information on WM is available at www.wm.com.