The Path Less Taken

The Path Less Taken

Waste Connections has built a billion dollar business by serving markets in which other public waste firms aren't found.

When it comes to running their business, Waste Connections officials aren’t afraid to do things a little differently.

While other big public companies often battle with each other for business in large urban markets, Waste Connections pursues a strategy that avoids the big cities and the competition found in them. The firm uses acquisitions to enter and build leading positions in secondary markets, while also seeking out franchise markets where the company would own the exclusive rights to the waste stream.

Also, instead of a traditional top-down hierarchical management structure, Waste Connections follows a concept called “servant leadership,” which holds management accountable to employees in ways that build a powerful, hardworking company culture, the company says.

Waste Connections’ differentiated strategy and bottom-up culture may represent a contrarian approach, but it’s hard to argue with success. According to industry analysts, the company, which ranked fifth on the most recent Waste Age 100 listing of the largest waste management firms, achieves business results second to none in the industry.

The company estimates that it generated $1.3 billion in revenue in 2010, up from nearly $1.2 billion in 2009. It provides collection, transfer, disposal and recycling services to more than 2 million residential, commercial and industrial customers. Its operations encompass 133 collection businesses, 55 transfer stations, 44 landfills, 38 recycling locations and six intermodal facilities in 27 states across the western, central and southern United States.

Smaller Markets

“The largest publicly held waste companies focus by and large on metropolitan statistical areas with populations greater than 500,000, while avoiding rural and further out suburban communities,” says Ronald J. Mittelstaedt, Waste Connection’s chairman and CEO. “They compete with each other for residential, industrial and commercial customers.”

Waste Connections has charted a different course. “Our model has very little of that,” Mittelstaedt says. “Mostly we’re in suburban and rural America, in metro areas with 150,000 people or fewer. We compete with small private companies. If a market we want to target is competitive, we’ll generally enter it by buying the largest private company.”

Mittelstaedt likes markets such as Wichita, Kan., where total annual market waste revenues are about $70 million; he dislikes more urban markets such as Chicago even though the city has about $900 million in total annual waste revenues.

In Chicago and similarly sized cities, the large public companies battle each other and dozens of smaller private companies for market share. Only 15 percent of Waste Connections’ revenues come from markets where Houston-based Waste Management or Phoenix-based Republic Services have a presence.

When Waste Connections enters a new market, it seeks to acquire the largest competitor in the area or sign an exclusive franchise agreement. All told, about half of Waste Connections’ revenue comes from competitive secondary markets. The other half comes from markets under long-term (meaning 10- to 40-year) franchise agreements, which are common in cities and counties west of the Rocky Mountains and beginning to appear in other regions of the country. By comparison, Waste Management’s franchise business accounts for less than 20 percent of its revenue, Mittelstaedt says.

Waste Connections’ annual report covering its first full year of operations as a public company (1998) announced the firm’s unusual strategy. In that year, the strategy produced just more than $54 million in revenue. In most of the years since then, the same strategy has produced $100 million or more in revenue growth.

Empowered Employees

Waste Connections officials also attribute the firm’s success in part to a management approach called servant leadership. According to the concept, which was first outlined by Robert K. Greenleaf in a 1970 essay entitled “The Servant as Leader,” managers serve their employees, rather that the other way around. As a result, employees should grow more engaged and autonomous, and a deep sense of community will result.

“It’s especially important to put employees first in a large organization,” says Worthing Jackman, executive vice president and chief financial officer. “You have to fight the urge to create bureaucratic layers and instead look for employees that you can empower.”

“Culture is a critical component of our success,” Mittelstaedt says. “It is unique. We have an esprit de corps that differs from other public waste companies. Our employees are more empowered and so more engaged.”

Servant leadership systems measure a manager by financial performance and by feedback from employees evaluating the manager’s commitment to principles like building community and developing employees. The personal relationships fostered by the management style have important business benefits.

“By driving culture, we have reduced turnover dramatically for front-line employees,” Jackman says. “At one time it was in the mid to high 30 percent range. Today it is 15 to 20 percent company-wide.”

Jackman adds that reduced turnover has resulted in improved safety performance. “For instance, our records show that we had fewer incidents in 2010 than we had seven years ago when we were less than half the size we are today,” he says.

Sustainable Operations

Any waste company with a presence on the West Coast must incorporate sustainability into its business model. Waste Connections recycles about 50 percent of its West Coast waste stream. In some markets, the diversion rate has reached 70 percent.

Currently, the company is using its West Coast recycling expertise to develop reuse, recycling and waste minimization programs in its central and southern U.S. markets. The company also is expanding its composting operations to serve the growing zero waste movement.

“Waste is also a resource that can be used to create energy,” Mittelstaedt says. “We are deploying methane gas recovery systems in landfills to generate electricity for third-party customers or to sell it to the grid. We’re also investigating methane as a possible fuel for trucks.”

In several markets in California and Washington state, the company already is using vehicles powered by alternative fuels such as compressed natural gas, liquefied natural gas and biodiesel. In San Luis Obispo, Calif., Waste Connections partnered with Seal Beach, Calif.-based Clean Energy, a company that builds fueling stations for alternative fuel vehicles. The company is evaluating additional fuel station partners for its San Jose, Calif., Pearce County, Wash., and Oklahoma City markets.

Waste Connections’ use of alternative fuels is part of a larger fleet optimization effort that includes:

  • Route optimization technology to reduce the number of trucks on the road, and cut fuel consumption and engine emissions.
  • Managing the company’s transfer station network to consolidate waste onto fewer trucks.
  • Installing truck controls to minimize idling time.
  • Using synthetic motor oil with longer replacement intervals.
  • Employing advanced technology engine filters and carburetors to further reduce emissions.

The company also contributes to organizations that work to advance environmental sustainability. For instance, a major Waste Connections grant helped to establish the Global Waste Research Institute at California Polytechnic State University in San Luis Obispo, Calif. The institute conducts research into technologies and practices that will help manage existing and emerging waste streams more effectively. In December, the firm’s Clark County, Wash., operations also donated $10,000 to the county Parks Foundation.

Reaping the Rewards

Not many companies continued to grow through the Great Recession. Waste Connections did, bringing in $1 billion in revenues for the first time in 2008 and moving up to about $1.2 billion in 2009.

"Our differentiated strategy produces superior financial results and creates greater value for shareholders," Mittelstaedt says. "Our stock price is up about 675 percent since our [initial public offering] in May 1998. The next best waste company in stock performance is up about 100 percent over the same period."

Analysts praise the company’s financial strength. In October, Los Angeles-based Wedbush Securities gave Waste Connections an “outperform” rating on the belief that third-quarter yield and volume growth would beat the company’s own estimates, which is what happened.

“Waste Connections has the best quality ratio in the industry when it comes to the percentage of free cash flow from a dollar of revenue,” says Michael E. Hoffman, who covers the environmental services industry for Memphis-based Wunderlich Securities.

Free cash flow is the cash left after all the bills — operating costs, taxes, installment payments and capital expenses — have been paid. It is money that can be paid back to investors in the form of dividends or used to fund acquisitions. Analysts say that free cash flow is the most important number to consider when evaluating financial strength.

According to Hoffman, Waste Connections’ free cash flow ranges from 16 to 18 percent of revenue. According to Securities and Exchange Commission filings, Waste Connections reported a free cash flow of 17.3 percent of revenue during the nine-months ending Sept. 30, 2010. By contrast, similar filings show that Waste Management’s free cash flow rate for the same period was 10.2 percent of revenue.

Hoffman goes on to say that given the company’s premium value, it may soon face an interesting challenge. “If the company adds $100 million in revenue every year, getting to $2 billion in five years is reasonable,” he says. “But what would that be worth to investors? Investors may want to see a $3 billion company in five years, and that may require becoming more urban.”

Mittelstaedt responds by saying that the discipline of the company’s differentiated strategy is what has created its value. “We might be two to three times larger if we were willing to buy other companies inconsistent with our strategy, but that isn’t how we believe you create long-term value,” he says. “Our future is more of the same. Stick to the strategy that has served us so well. Aim for $100 to $120 million in revenue growth per year by filling in the markets in our 27-state platform.”

Waste Connections likes being out there — where other waste companies don’t want to go — and Mittelstaedt isn’t planning on changing.

Michael Fickes is a Westminster, Md.-based contributing writer.

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