Waste Management earnings: Keeping things in perspective

Collection and disposal continue to be the “cash cow” for WM, with this segment generating net operating revenue of $19.7 billion or 89.3% of revenue. Recycling processing and sales contributed $1.6 billion or 7.3% of total revenue.

We always knew that collecting solid waste and burying it in big holes in the ground was a lucrative business. These number validate that. The question is how we shift some of that emphasis to recycling, which is badly needed.

Key takeaways from WM management discussion for recycling

There were a number of things that grabbed our attention from Management Discussion and Guidance for 2025:

• The company expects to begin generating higher operating EBITDA from its past capital investments in recycling automation and growth projects.
• 2024 EBITDA of $53 million is expected to rise to $120-130 million in 2025 and more than double in 2026 to $250-260 million. 2027 guidance is for $290-300 million.
• Capex in the segment will decline from $443 million in 2024 to $65-85 million in 2026 as the company moves from aggressive growth capitalization to “harvesting” those investments.
• The company’s 2025 forecast for EBITDA are predicated on an average single stream commodity package (e.g., aluminum /steel-old corrugated cardboard, plastics, mixed paper) of $85 per short ton. 2026 sees a very aggressive revenue increase of $125 per short ton, or 47%.
• WM’s sensitivity analysis says that for every $10 per short ton change in the commodity package, there is a $25 million impact on EBITDA.

Aluminum remains the linchpin behind single stream recycling

Aluminum has always been the economic driver behind single-stream curbside collection. Although it represents only 2.7-3% of the total material generation (paper at 40%, cardboard at 14%, steel 3%, plastics the rest), aluminum represents about 50% of the revenue stream.

Aluminum outsized influence on that aggregate commodity package price is one of the reason’s that U.S. curbside operators such as WM, Republic, Waste Connections and Casella get alarmed by the threat of new deposit legislation.

Why Curbside Recyclers Fear (and Oppose) Deposit

Curbside recyclers believe the introduction of new deposit legislation in states that they operate in would divert the aluminum into redemption centers. This would reduce their revenue stream and turn their material recovery facilities (MRF) into the red. There is some logic in that argument.

However, the available data on recycling rates and MRF within the existing deposit states offers some intriguing arguments that might change opposition.

The below table shows the redemption rates in the 10 existing deposit states. Clearly the $0.05 per can deposit in 9 states and $0.10 in 1 (Michigan) are not enough of a financial incentive for people to turn the cans in for the deposit.

Source: Ball 50 States of Recycling 2021

It is important to note that many MRF operate within these 10 states now. In fact, the largest MRF in the U.S. is operated by Sims Recycling in Brooklyn, NY. Eight of the top twenty largest MRF in the U.S. and Canada operate within deposit environments. They are surviving just fine.

Why are they able to co-exist? The simplest reason is the consumer is too lazy to take their cans back to redemption centers for the $0.05-$0.10 deposit refund. The redemption rates above only capture what is redeemed for deposit, not what will be captured by the MRF in these states through curbside, single stream programs. MRF in these states are clearly getting enough aluminum back to underwrite their entire curbside programs or else they would not be operating them. 

Unredeemed deposits are the key to eliminating MRF opposition

Here is where this gets interesting for both incumbents in deposit states and possible new states.

From the table above please note who gets to keep the unredeemed deposits. It is the states and, in some cases, the distributors. That’s “serious found money.” Here is some perspective. It is estimated that the California Beverage Container Fund holds $819 million in unredeemed deposits. That represents the equivalent of nearly 250,000 metric tons of aluminum.

Now, imagine the following idea. What if a core tenet of any new deposit bill allowed the MRF operators in each state to claim the deposit back for what came through their system via curbside programs? That $0.05 per can or $1.50 per pound, it would bump up revenue enormously. Used beverage containers today are worth $1.13-$1.15 per pound based upon their intrinsic value. A MRF operator would not only earn the intrinsic value but also this $1.50 for the deposit.

This “super-charging” of revenues would allow MRF to potentially expand the scope of their curbside services to more communities in each state and increase recovery.

Allowing MRF to claim unredeemed deposits is an effective way to defuse single stream operator opposition and get badly needed deposit legislation expanded into states with high population and can consumption.