Cleaning Up After Waste ManagementJames E. Ellis
For more than a decade, WMX Technologies Inc. was the quintessential growth stock. WMX--formerly known as Waste Management Inc.--fed profitably off the never-ending stream of refuse generated by modern life. But the '90s are proving a lot more difficult: The Oak Brook (Ill.) company has been battered by a sluggish economy, improved corporate waste-reduction programs, and a cutback in industrial-cleanup work as the Clinton Administration rethinks its environmental policies.
Add it all up, and WMX is no longer the hot item it once was on Wall Street. In the 1980s, WMX's profits and revenues rose by a compound average annual rate of 28% and 25%, respectively. But last year, the company's earnings dipped an estimated 7%, to $790 million, on sales growth of just 5%, to $9.1 billion. Although its stock price has picked up lately, WMX is trading at 29 1/4, roughly 28% below where it was a year ago. That year-long drop slashed a staggering $6 billion from the company's market value, to $14.2 billion.
Despite the decidedly unfriendly climate for waste-management companies, WMX Chief Executive Dean L. Buntrock has crafted a comeback plan. He is slashing costs and downsizing key units. At the same time, Buntrock, who co-founded WMX in 1968 along with H. Wayne Huizenga, now CEO of Blockbuster Entertainment Corp., is scouring the globe for new business. At home, WMX is expanding aggressively into new waste-management areas, such as water treatment. And it's chasing new contracts in Europe, Latin America, and Southeast Asia, where environmental regulations are tightening. "We've disappointed investors," acknowledges Buntrock, 62. "To gain back that credibility, we have to deliver the results that we say we're going to."
NAME GAME. Last year, Buntrock took a stab at trying to improve results by completing a complex reorganization that split WMX into five publicly traded units with extensive cross-ownership. They include WMX, the holding company that controls each of the units. WMX also owns all of Waste Management of North America Inc., which collects and disposes solid waste and operates landfills. It accounts for 60% of WMX's revenue. The other units are Chemical Waste Management, which disposes of hazardous waste; Wheelabrator Technologies, which builds energy plants that use waste as fuel; Rust International, an environmental consultant and general contractor; and Waste Management International, a London-based unit that oversees business outside North America.
Buntrock believes the sweeping restructuring enabled WMX's varied businesses to sharpen their focus. It also let shareholders pick and choose which environmental industries to invest in. Still, the glory days won't return quickly or easily for WMX. The downturn in the economy has meant weaker industrial production, thus smaller amounts of industrial waste. At the same time, big manufacturers, responding to stricter federal regulations, have dramatically cut the amount of pollutants they create.
Now, there's added uncertainty over the once booming hazardous-waste business as Washington reviews its stand on incinerators. Last May, Environmental Protection Agency Administrator Carol M. Browner ordered an 18-month freeze on new hazardous-waste incinerators. Some industry insiders worry that the Administration may opt for a new disposal technology or push for more hazardous-waste reduction.
To adapt to leaner times, Buntrock is restructuring his biggest units. The reorganization at ChemWaste, 78% owned by WMX, has been the most painful. Last year, the company took a $550 million charge partly to slash 1,200 workers--24% of its work force--and to write off the value of its Chicago incinerator. The plant, closed since a 1991 explosion, has been investigated by regulators to determine if it had proper safety procedures.
Buntrock is trying to keep the unit's other incinerators on line, in part by lobbying Washington to toughen regulations on companies that operate cement kilns. The kilns burn hazardous waste, along with other fuel, but aren't required to dispose of the remaining ash as if it were a hazardous material--giving them a cost advantage. In November, Buntrock arranged a meeting of the EPA's Browner and commercial incinerator operators. EPA officials say the regulation of cement kilns is being addressed in its broader review of incinerators.
Lobbying aside, Buntrock knows he has to drum up new business to get WMX growing again. Already, he has his sights on the estimated $200 billion that Washington is expected to spend through 2020 to clean up decommissioned nuclear plants, defense factories, and other government facilities. WMX's Birmingham (Ala.)-based Rust International has so far won only two such contracts, worth $350 million. But the company has outstanding bids on $6 billion worth of federal cleanup work.
LONGER LIST. Wheelabrator, 58% owned by WMX, appears to have clearer prospects. Now that the demand for waste-to-energy plants has cooled in the U.S., the company is pushing into the fast-growing water-treatment business. This year, Congress is expected to revise the Clean Water Act, increasing the number of pollutants that municipalities and businesses must reduce. What's more, the EPA is already pushing for tougher drinking-water standards. Wheelabrator President John M. Kehoe Jr. believes the 1990s will be "the decade of water."
To position itself, Wheelabrator has been buying water-treatment companies. Over the past three years, it has purchased 10 of them. The company is also offering to build and operate water-treatment plants for cash-strapped municipalities that can't afford $10 million to $30 million to build such a facility.
Yet the biggest hopes rest overseas, where WMX estimates that some $300 billion is spent on environmental services every year. Last year, the company generated only $1.5 billion from foreign projects. In Europe, WMX is betting that European Community initiatives to set continentwide standards on environmental issues such as landfill construction will spawn new business. But the real promise is in the Pacific Rim, where torrid population and economic growth is spurring environmental concern. WMX already operates a hazardous-waste facility for Hong Kong and is bidding on six waste-to-energy plants in Taiwan. "Our business is still significantly tied to population, and the population in Asia--where they still don't have basic sanitation in many places--expands that big opportunity greatly," says Buntrock. "There's no doubt it will be our fastest grower." Of course, there are risks: Waste Management International's sterling-denominated profit growth last year was wiped off of WMX's books because of the strengthening dollar.
To some degree,
Buntrock's strategy is changing the market's perception of WMX. Analyst James D. McDonald of Chicago Corp. says WMX's profits this year may rise to 10% above his estimate for 1993, to $871 million, as its revenues climb 13%, to $10.3 billion. Even Buntrock concedes that the boom days are over. But that doesn't mean WMX has stopped growing. If he's right, Buntrock will prove that WMX can climb out of the dumpster.
WMX'S COMEBACK STRATEGY
RESTRUCTURE It's cutting costs and downsizing key units. At Chemical Waste Management, WMX has slashed 1,200 jobs--24% of the work force. The company has also written down the value of one of its big incinerators.
DIVERSIFY WMX is expanding aggressively into new businesses. Through its Wheelabrator Technologies unit, the company is marketing new water-treatment services and building treatment plants.
GROW It's looking for more business in Europe, Latin America, ABROAD and Southeast Asia, where environmental regulations are tightening.