The company’s earnings show a slight increase in revenues and a big decrease in average recycling commodity prices at its recycling facilities.

Mallory Szczepanski, Vice President of Member Relations and Publications

April 20, 2018

6 Min Read
Waste Management Feels Impact of China’s Contamination Standard, Import Ban in Q1 2018

Houston-based Waste Management felt the impact of China’s recently enacted waste import ban and contamination standard in the first quarter of 2018. In addition to seeing a 36 percent decrease in average recycling commodity prices at its recycling facilities, it saw an uptick in operations costs and transportation costs due to making the switch to send materials to areas like Vietnam and India.

“We’ve said for years that recycling is a business that Waste Management is committed to, and we still are, but we simply cannot continue with the model in its current state,” said Waste Management President and CEO Jim Fish on a call with investors. “Last year, the Chinese government decided that they were tired of importing increasingly contaminated recyclables, so they changed their policy to only accept recyclables with a 0.5 percent contamination content. Some of our plants see material come in the front door that is 40 percent trash, so we have to try and pull out almost 99 percent of that trash from the recycling stream in order to sell it to China as recycled commodities. Even our best-in-class inbound streams that have only 10 percent contamination still have to pull out 99 percent of the trash before they can sell it. As diversion goals have increased, so too have our contamination percentages, which have increased from 10 to 15 percent five years ago to 20 to 25 percent today.”

In an effort to overcome these challenges, Waste Management is auditing the loads received at its materials recovery facilities and working with industry stakeholders to educate customers on how to recycle right and lower contamination.

For the first quarter of 2018, the company’s revenues were $3.51 billion, up 2.1 percent from $3.44 billion from the same 2017 period. Net income for the quarter was $396 million, or $0.91 per diluted share, compared with $298 million, or $0.67 per diluted share, for the first quarter of 2017. On an as-adjusted basis in the first quarter of 2017, net income was $291 million, or $0.66 per diluted share.

“We delivered strong operating and financial results in the first quarter,” said Fish in a statement. “We saw organic revenue growth of 6 percent in our collection and disposal business, which drove the almost 8 percent increase in the company’s operating EBITDA for the quarter. This strong operational performance resulted in robust net cash provided by operating activities and free cash flow, which allowed us to return $456 million to our shareholders in dividends and share repurchases and to spend $248 million on acquisitions. The traditional solid waste business is in exceptional health, and we achieved outstanding results despite significant challenges presented by external market factors in the recycling line of business. The great start to 2018 shows how well we are executing upon our strategic plan, and we will continue with the focus and discipline required to produce strong results in the face of the challenging recycling environment.”

Other highlights for the first quarter:

  • Overall revenue increased by 2.1 percent.In the first quarter, the company saw collection and disposal revenue grow by more than 6 percent, total company operating income grow by 9 percent and operating EBITA increase by nearly 8 percent.

  • Core price, which consists of price increases net of rollbacks, plus fees other than the company’s fuel surcharge, was 4.9 percent, compared to 5.1 percent in the first quarter of 2017 and 4.8 percent in the fourth quarter of 2017.

  • Internal revenue growth from yieldfor collection and disposal operations was 2.3 percent, compared to 2.0 percent in the first quarter of 2017.

  • Traditional solid waste internal revenue growth from volume was 3.0 percent, or 3.4 percent on a workday adjusted basis, in the first quarter. Total company internal revenue growth from volume, which includes recycling and other ancillary businesses, was 2.6 percent, or 3.0 percent on a workday adjusted basis, in the first quarter.

  • Average recycling commodity prices at the company’s recycling facilities were about 36 percent lower in the first quarter of 2018 than in the prior year period. Recycling volumes decreased about 1 percent in the first quarter of 2018. Results in the company’s recycling line of business declined by $0.08 per diluted share when compared to the first quarter of 2017.

  • As a percent of revenue, total company operating expenses were 62.2 percent in the first quarter of 2018, compared to 63.0 percent in the first quarter of 2017.

  • As a percent of revenue, SG&A expenses were 10.6 percent in the first quarter of 2018, compared to 11.3 percent in the first quarter of 2017.

  • Operating EBITDA was $955 million for the first quarter of 2018, an increase of $69 million, or 7.8 percent, from the first quarter of 2017.

  • Net cash provided by operating activities was $809 million in the first quarter of 2018, an increase of $87 million, or 12.0 percent, when compared to the first quarter of 2017.

  • Free cash flow was $423 million in the first quarter of 2018, compared to $397 million in the first quarter of 2017.

  • The company paid $206 million of dividends to shareholders and paid $250 million to repurchase shares in the first quarter of 2018.

  • The company spent $248 million on acquisitions of traditional solid waste businesses during the first quarter of 2018.

  • Waste Management’s effective tax rate for the first quarter of 2018 was approximately 23 percent. The company expects its 2018 full-year tax rate to be between 24 percent and 25 percent, which is lower than previous expectations due to additional clarity on the impacts of tax reform.

  • “2018 is off to a very good start for us, and the results give us confidence that we are on track to achieve our full-year 2018 guidance of adjusted earnings per diluted share of between $3.97 and $4.05 and free cash flow of between $1.95 and $2.05 billion,” said Fish in a statement. “Our employees have continued to deliver strong performance and are focused on delivering exceptional customer service, growing profitable volumes and improving our cost structure to produce another successful year for Waste Management.”

  • “Recycling is one-tenth the size of the solid waste business, and the solid waste business is absolutely rockin’ and rollin’ right now,” said Fish in a call with investors. “Recycling is a good thing, but, unfortunately, it has shifted away from this recycling for the saving of the world’s natural resources concept to diversion, which means how much less can I put in my trash bin and how much more can I put into my recycling bin. That change has bad, unintended consequences.”

  • “Our customers want single stream recycling, and we are committed to single stream recycling, so what we want to do is make sure we improve the process,” Fish said on a call with investors in response to a question about switching from single stream recycling to dual stream recycling. “Some [of the improvements] can be done through technology, and we are looking at different technologies to improve the stream, but we are too far down the path to do anything other than what we are doing today in terms of single stream. Our best course of action is to improve the model on both the financial side and the materials side.”

About the Author(s)

Mallory Szczepanski

Vice President of Member Relations and Publications, NWRA

Mallory Szczepanski was previously the editorial director for Waste360. She holds a bachelor’s degree in journalism from Columbia College Chicago, where her research focused on magazine journalism. She also has previously worked for Contract magazine, Restaurant Business magazine, FoodService Director magazine and Concrete Construction magazine.

Stay in the Know - Subscribe to Our Newsletters
Join a network of more than 90,000 waste and recycling industry professionals. Get the latest news and insights straight to your inbox. Free.

You May Also Like