Waste Management sees the green light

Thursday 28th March 2002

One sign of a good company is its ability to respond to market forces. Some of the world's largest and most successful companies earn their profits from completely different businesses than when they were founded.

Their competitors that didn't change, undertaking the equivalent of making better wagon wheels to compete with the motorcar industry, died out.

Waste Management, traditionally a "dig a big hole and bury everything" company, is reinventing itself in the face of a growing green movement as an environment-friendly waste treatment and "resource recovery" company.

Its latest annual report doesn't insult the reader by pretending it has seen the green light but talks of "capitalising on the commercial opportunities that stem from the new resource recovery agenda."

There seems to be plenty of scope for this, both locally and overseas, where Waste Management has begun to expand.

While other companies balk at showing geographical results, chairman Alton Jamieson's review shows the information prominently. Acquisitions in Australia last year helped the company record $15.6 million in sales and $1.8 million in net profits, a margin of 11.5%. That is well below the 16.7% achieved on its $138 million in New Zealand sales but the company says it's early days and the prospects for growth in the Australian market are good.

They have to be better than its growth potential in Auckland, where the company last year suffered fierce competition and the loss of major council contracts.

This contributed to an 8.7% decline in net profit for the year to December 31 to $13.1 million, despite a 12% increase in sales to $154.4 million.

As Mr Jamieson puts it, "Because of the size of our Auckland business, the increases in performance in our other divisions could not compensate for this impact."

Managing director Kim Ellis prefers to look beyond last year's disappointments in a very lucid and informative commentary. This is labeled a "strategic review" - a concept all too rarely touched upon in annual reports.

"As challenging as the year was, I am confident that over time it will be remembered less for the difficulties we experienced in our Auckland market than for the company's successful entry into Australia barely a year following the exit of our major US shareholder. The significance of this development is not to be underestimated given our aim to secure an increasing proportion of our earnings growth in that market over the next few years," he starts.

There doesn't seem much room for doubt in his mind but plenty of vision and enthusiasm - exactly what shareholders want from a managing director.

His logic is compelling, as last year's earnings dip is the only decline shown in the report's five-year trend statement.

It has come a long way from 1997 when it earned $9 million on $73 million in revenue.

That said, on an earnings-per-share basis it has shown no growth in the past four years while net return on average shareholders' funds has fallen from 14.8% to 8.1% in the same period.

Perhaps it is the need to break out of this unattractive pattern that has stimulated the company to seek new opportunities overseas. This was a strategy denied to it when it was a subsidiary of the US giant of the same name but now appears to have been enthusiastically adopted.

As evidence of its commitment to the environment, the report devotes several pages to a review by Warwick Giblin, whose title is corporate environmental manager. His job is to help the company manage its environmental risks and make money from the global trend toward "sustainable development."

His revelation that the company recycled, and thus prevented the dumping of, 164,000 tonnes of organic and inorganic matter, including 5000 tonnes of used fuel oil, puts the importance of such work in perspective.

In Waste Management's case, a willingness to change to meet market conditions is likely to deliver benefits, not just to shareholders and not only to its bottom line. That's definitely the model for a 21st century company.

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

Comments from our readers

No comments yet