Report Card : Waste Management shows enthusiasm

Friday 18th May 2001

Contrary to popular business opinion, size isn't everything.

Research has found that takeovers in the pursuit of economies of scale or greater profitability are just as likely to do the opposite. From an investor's perspective, a small rich company is more attractive than a large poor one.

Waste Management's latest annual report makes much of its first full year as an enlarged entity following the mid-1999 acquisition of Waste Care, which almost doubled the size of its business.

"The management team have clearly extracted the anticipated synergy benefits in merging the two businesses," says chairman Alton Jamieson in his review. He cites a 25% increase in revenues, a 22% rise in net profit and an 8% improvement in earnings per share as evidence of this.

One cannot reach this conclusion from those figures. The increases appear to have come from booking a full year's worth of sales and income from Waste Care compared with only six months in 1999.

Financial controller Grant Tietjens who, in a welcome feature gets his own review, has more concrete evidence. He shows that gross profit margin has risen to 33.5% from 31.7%, which indicates the company "has been successful in generating the synergies expected." Even after allowing for depreciation and amortisation, the margin is higher.

Naturally, he is quoting the prettiest numbers. On measures that are of no less interest to shareholders - net profit and return on equity - the company has delivered no benefits.

Ratios given in a five-year trend statement near the end of the report show the return on average shareholders' funds (excluding abnormals) has fallen from 14.8% in 1998, the year before the Waste Care takeover, to 10.4% in 1999 to 9.5% last year. The average return in the three years to 1998 was 14.2%.

Some additional calculation finds net profit of $14.3 million in 2000 is a margin on sales of 10.4%. This is down on 1999's 10.7%, 1998's 13.7% and the three-year pre-takeover average of 12.7%.

It seems the newly enlarged Waste Management has a way to go yet before it can claim to be delivering an improved performance.

Fortunately, the company has a strategy for achieving just that. In a clear and comprehensive report to shareholders, managing director Kim Ellis delivers a "strategic overview" that explains the thinking behind the 1999 merger, why the company is pursuing offshore opportunities and even how and when those opportunities are going to be exploited. He bravely takes ownership of the plan and leads by example, stating he will take charge of the push into the high-growth potential UK market.

Another feature of the report is a detailed "capabilities profile," which exhibits talents the company attributes to its success. These capabilities range from truck fleet design (including photos of the trucks) to landfill development, waste processing and even its propensity for joint ventures.

For many readers, these 12 pages of information would fall into the "more than you need to know" category but it is cleverly compartmentalised so readers know they don't have to wade through that material if they are looking for other information.

Waste Management's report has done a good job in communicating what it is and does and, most importantly, where it is going. While it kicks off with the standard wishy-washy mission statement, other parts give a sense of a real enthusiasm and excitement about the business and its prospects. This is important because shareholders are quick to realise that, if the people within a company aren't excited about it, then there is little reason for the owners to be.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. www.mcewen.co.nz, davidm@mcewen.co.nz

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