Tossing Out The Trash At Browning Ferris
Bruce E. Ranck is a reluctant dieter--grapefruit and low-cal shakes make him cringe. But at 5 feet 9 inches and 210 pounds, "I'm always on a diet," says the chief executive of Browning-Ferris Industries Inc. (BFI), the nation's second-largest waste hauler. Now, BFI is slimming down, too. After more than a decade of acquisitions-led growth, the bloated $5.8 billion company is on a crash diet. Ranck, a 27-year BFI veteran, is consolidating operations to slash costs, buying back shares, and putting the brakes on further buys. Although BFI today has the worst returns in the $35 billion trash industry, Ranck promises an overhaul that will put it at the top of the heap. "Our longer-term goal is the best return on assets in the business," he says.
It's a far cry from the BFI of old. Under former CEO William D. Ruckelshaus, the onetime head of the Environmental Protection Agency who remains chairman of the company, BFI was one of the industry's great consolidators. Much like its bigger rival, Waste Management Inc., BFI grew rapidly by snapping up local dump sites, collection routes, and recycling businesses across the country and abroad. From 1991 to 1995, BFI lavished $2 billion on acquisitions--buying as many as 114 companies a year. But problems digesting those deals have left both giants on the sidelines as a new crop of consolidators gobbles up the kinds of companies BFI and Waste Management once eyed.
Ranck is an unusual choice to reverse BFI's course. He was the company's president and chief operating officer during the years that willy-nilly acquisitions sent costs spiraling out of control. Even as BFI was paying top dollar for collection routes, it failed to link many to company-owned landfills. That left BFI paying ever-higher prices to outsiders to dispose of its trash. At the same time, BFI was charging headlong into recycling, a Ruckelshaus favorite. In all, the company spent some $300 million to build 150 handling centers and become the nation's largest recycler.
But by 1996, that strategy fell apart. BFI started losing customers to lower-cost trash haulers, and recycling prices collapsed. When profits on recycled paper and glass--which had ballooned during the prior two years--disappeared, earnings went into a tailspin. After taking a $447 million charge, BFI finished the fiscal year that ended in September, 1996, with a $101 million loss on sales of $5.8 billion. By October, Ruckelshaus was bumped up to chairman and Ranck became CEO.
"NO DOUBT." Now, the unlikely reformer is proceeding with the fervor of a convert. For the year ended on Sept. 30, Ranck shed $800 million in assets, lopped off $400 million in capital spending, and cut $100 million in annual operating costs. Some 1,800 workers have also been laid off. "Spend any time with Bruce Ranck, and there is no doubt he desperately wants to get this right," says Alan Wilson, a vice-president at Capital Guardian Research Co., which holds 4.1 million BFI shares.
Beyond cost-cutting, Ranck has tried to rationalize BFI's scattered assets. Gone are a big California landfill that didn't align with collection routes, as well as hauling operations in Ohio and Pennsylvania that weren't near a BFI landfill. An underperforming trash business in Italy that BFI had taken control of in 1995 is also history. Although the sell-offs will lower 1997 revenues by about $400 million, Ranck has halted the slide in operating margins. From 9.7% a year earlier, they hit 12.3% for the quarter ended June 30. Salomon Brothers Inc. analyst P.J. Juvekar expects earnings to rebound to $331 million this year and rise 16% more in fiscal 1998.
So far, Wall Street likes what it sees. Although BFI's laggard shares still trade below their June, 1990, high, so far this year they've gained 39%, to around 35. "The question we had was: Could this management team with that asset base get those returns up? They've proven it," says Wilson.
Some of the changes are so simple, it's amazing they weren't done earlier. In the past, local collection managers didn't have a stake in increasing landfill revenues, so they didn't care if trash went elsewhere. In BFI's Charlotte (N.C.) unit, some collection operations "may have been putting 50% or 60% of the disposal into non-BFI landfills because it was convenient," says Tony Davies, the vice-president who overseas that market. Moreover, BFI's fragmented approach encouraged customers who wanted one bid for all trash, recycling, and medical waste to go elsewhere.
HUB-AND-SPOKE. Now, Ranck wants BFI's 110 landfills and 14,400 collection trucks to run like a hub-and-spoke system. He views collection routes, customer pricing, and landfilling as an integrated system rather than separate units. "The more you feed into internal landfills, the more profitable the system becomes," says Gregory D. Brenneman, a key architect of the turnaround at Continental Airlines Inc. and a new BFI board member.
Still, the old itch to buy hasn't entirely disappeared. Ranck calls the current streamlining temporary. "This is an opportunity to get our house in order before the next growth phase," he insists. For now, Ranck says he'll tread lightly with acquisitions, preferring small "tuck-in" purchases that add to market share in existing markets--not the Pac Man style of BFI's past. "Internal growth will have to play a larger role," he says.
Yet even if the changes deliver revenue growth, Ranck concedes that "we should be growing the bottom line at a rate faster than the top line." And elsewhere, he still has plenty of work. Operating margins remain just one-third those of rival USA Waste Services Inc. and about half those of Waste Management, owing largely to BFI's big bet on recycling. It overbuilt recycling centers and loaded up on long-term contracts. The idea was to price recycling low enough to capture paper, glass, and plastics; BFI figured it would profit by reselling the materials.
That strategy worked when paper went for $200 a ton, not the current $60. Ranck hopes to persuade customers to rewrite their contracts--even though many don't expire until 1999. In the meantime, he's closing 32 recycling centers.
A bigger challenge will be global operations. Although BFI sold off its Italian business, its German and Spanish units remain in the dumps. Now, Ranck must show that he can export his cost-cutting and return-on-assets strategy to Europe. "I think North America has religion [but] it has to go across the Atlantic," says James Miles, a portfolio manager at Hotchkis & Wiley, a Merrill Lynch & Co. unit that holds 2.8 million BFI shares. So look for Ranck to begin hawking his diet plan to the pilsner and Wiener schnitzel crowd.