Last month, Waste Dive met with outgoing Waste Management COO Jim Trevathan in Houston to discuss his 39-year career with the company. The first half of that extended interview touched on the evolution of company culture under various CEOs, labor retention strategies, as well as safety.
This second half explores recycling costs, the future viability of landfills, Trevathan's favorite job with the company (aside from being COO) and what he plans to do next.
The following interview has been edited for brevity, clarity and context.
WASTE DIVE: Looking over your career, how does the current situation with recycling compare to what you've seen? Is there more pressure now than with previous market dips?
JIM TREVATHAN: Yeah, there is more pressure today, and it comes from a couple sources. One, we've always had a commodity priced cycle that occurred. Whether it was a three, or five or six-year cycle, we priced our service. Most recycling is residential, with cities or communities. It's where 70% of our volume comes from. Those are generally three- to- seven-year contracts. So if you price them appropriately for the cycle, on a historical basis, we did okay. It was a high-return on invested capital line of business for us. Shareholders did well with it, and we gave our customers what they want, which is recycling.
For the last eight or 10 years, that cycle hasn't played out as consistently in the past. Prices had stayed low, especially for fiber. Then, you add contamination to the waste stream. That compounds the problem with recycling.
I think we're being reminded, the whole industry is and so are communities, that without demand for recycled materials there's not any profitable recycling. The investment doesn't pay off if you can't see a long-term return for shareholders, and use of that capital comes into perspective. So we're going back to customers and showing them the facts, showing them contamination levels. As more and more communities want to recycle, more people put non-recyclables into containers, that's causing a double problem.
Trevathan notes how Waste Management has found other export options beyond China, though some of those countries are also starting to demand higher quality material.
So the whole marketplace is changing. I think that it'll be good for the industry, and for recyclers and for our customers in the long run. But we'll go through a difficult period here, and once we're through it, with repriced contracts, and with contamination levels that are appropriate, then you'll see recycling go right back where it was, but cleaner, more efficient, and where companies can invest again.
We're in most cities where we want to be, where we've got plenty of outlets for material, both internally and a few that we use external recycling sources. We'd love to invest more, but shareholders want to make sure there's a long-term return, or it's not worth the effort. We'll put our money to work for shareholders in better places.
We'll do it with a customer base that understands that long-term dynamic, and wants to be part of that long-term issue to get recycling right. I've got a red hat sitting there that says "Make Recycling Great Again" that somebody gave me. That's our mission right now, and we have clear actions underway.
With so many cities and companies setting big sustainability targets, and waste generation per capita trending down a little, do you ever see a future where recycling accounts for a larger percentage of revenue for the industry at large? Assuming contracts can be fairly priced?
TREVATHAN: I think time will tell ... First of all, you have to have an outlet, whether it's plastic, or metal or fiber.
Right. Say some new mills open up in the next few years as many are thinking they may, if that can fall into place.
TREVATHAN: Yeah, if that falls into place, and customers can ship or separate, or we can get clean material, then I think that can grow. Until that happens, I'm not going to project what year or what quarter that happens.
I think, as long as entities want to talk about diversion instead of how much is actually recycled, I'm not sure your story will play out as you described. We have to get entities that generate the volume to realize that the goal is not just diversion when it still goes to a landfill on the back end because it can't be recycled.
You have to have a recycling process or business model that provides that clean material, and you got to have a buyer on the back end. That's where, I'm not sure in the short term, two or three years, we're going to see great strides in that volume going up.
Earlier this year, during the company's Q1 call and subsequent WasteExpo interviews, CEO Jim Fish made a point of differentiating between "diversion" and "recycling" by emphasizing the need for clean material above all else. This builds on the company's ongoing work to redefine recycling metrics by potentially using greenhouse gas emissions instead of weight-based metrics.
I think what's clear is customers want to recycle. Whether it's a commercial customer, or an industrial customer, or a municipality, or an individual homeowner. How do we get that model right so we meet all the requirements shareholders expect?
That'll take some time to sort out. The old business model's been around for 10 or 20 years, and it takes a while to change that, but it requires changing to make sure future investment occurs. We're testing some robotic capability in our recycling facilities. It's a way to go before that's viable in a large number of locations, but can we positively sort instead of negatively sort? Pull out things that have value instead of pull out the things that don't have value.
We're about to build a facility in a Midwestern city that's primarily robotic. We'll play with that and make sure that we can turn it into a business model that adds shareholder value, and customer value.
Thinking of where we're headed in the next 10-20 years, it seems like there's pressure building around this area. People may not always be recycling correctly, but they also don't like living near landfills. Jim Fish mentioned at WasteExpo that your neighborhood is close to a landfill for example.
TREVATHAN: I'm within a couple miles, as the crow flies, of one of our largest.
Everyone recognizes that even with the best run facility, it's to make sure everyone's happy in the community. Is that a growing tension?
TREVATHAN: Well, there are not going to be new inner city landfills in your lifetime. Maybe a couple ... but new, permitted, that isn't going to happen.
[We still have] over 20 years of life, on average, for our sites. So we've got plenty of time and a lot of expansion opportunities at those sites. But there are some that are inner city, or what I would call 10 or 15 miles from inner city, that are going to close in the next, say, 10 years. The transition will have to occur.
That's going to require longer transportation, so getting our arms around the transfer station model. And where does that waste go? Cost goes up when that happens. It also adds value to that current inner city permitted space. How do we make sure we price that correctly so we're using that next 10 year inner city landfill space wisely from a shareholder perspective?
[But] unless the world changes, and more materials can be recycled to meet the requirements we talked about, landfills are going to be around for a while. That's why I think I'm most proud of our company's asset base. We're in excellent shape long term with landfill capacity.
The conversation turns to cities and states that are already doing long-distance export now, including New York where Waste Management has a 20-year city contract and Massachusetts where the company aims to expand an existing site. Trevathan then raises the concept of alternative methods, which he said were hampered by the recession and currently low oil prices.
Today we could turn a lot of MSW into energy, but it doesn't make a lot of sense economically, and cities are not going to pay more ... as long as they have an alternative.
They may not want a landfill, but they sure don't want a waste-to-energy plant either. Not sure that makes a lot of sense, but that's the public, that's the issue that we all deal with today. So today, the best alternative is still permitted, safe, technically sound landfills, but it's going to move further away from the inner city. That's going to happen. Therefore, there are some really large facilities that we own, and our competitors have some sites as well, that could receive a lot of waste for a long time via rail from a lot of places.
I've also asked Jim Fish and Ron Mittelstaedt this, and they do believe that the model may eventually change. There are a lot of promising concepts out there, but few have taken off yet. If it's not landfills or mass burn waste-to-energy, could something else come along?
TREVATHAN: There are two things that have to dramatically change to make that viable. Number one, the collection method may have to change to meet the technology that we can't describe today. Neither of us know what that might be, but whether it's 10 years or 20 years away, what is that technology and how do you collect it?
Well, changing the collection method across every neighborhood, and every business in North America, that's not a simple matter. [If this new technology requires] the whole method of collection to change, and I think it might, I'm not sure that you'll ever find a technology that can take the non-consistent MSW waste stream and turn it into something that has value. Then, on the other end, can it manage the diverse nature of MSW across North America?
Businesses and homeowners are not going to be amenable to change the current collection method easily without either regulation or fines, something dramatic has got to do that. That's why that transition's going to be slow and steady. I think companies — and we're not the only one but I think we're the best, that has a great landfill network, and a great recycling network, and a great transportation network — in the long run will be part of the solution. Whatever that evolves into.
Hours before the interview, GFL Environmental announced plans to acquire Waste Industries in what so far has been the biggest deal of the year.
Do you think we could see more big deals like that in the future?
TREVATHAN: Yeah, I think there's more consolidation opportunities.
Across North America, about 40%-50% of what's collected is still probably collected by small and regional players. They may bring it to our facilities, or our competitor's facilities, but few are integrated that are within one metropolitan area, or two or three.
There's still plenty of opportunity there, from an M&A perspective. You get larger than that and it gets a lot harder. Just from a competitive standpoint, it gets harder. It's not out of the picture that more consolidation could happen, but most of it's going to be those tuck-ins.
Is that good for the customer, you think?
Even if they have fewer choices?
TREVATHAN: Well, but they also have more service opportunity.
The smaller guy does an excellent job of completing their daily task of collecting waste. I don't think they can afford the technology that connects us ... People are going to want things different over the long run, and I think the larger companies can add some — I know we plan on it — digital connectivity that creates an advantage for our customer, and a simplicity of doing business.
So it doesn't minimize the great businesses that the small entrepreneurs have started, and that's how we and the other three or four of us have built our businesses. Most of it has come through acquisition.
You've had a lot of titles at the company. Is there any other job you miss from back in the day?
TREVATHAN: I started on the chemical waste management side of our business, the hazardous waste side.
[We started] ENRAC, the Environmental Remedial Action Division, when the Superfund legislation really got started. I was part of starting that in the southern part of the country. We were cleaning up both public and private waste sites for large Fortune 500 companies as well as for states and for the federal government.
I'm a pretty competitive person, and I like seeing start to finish. With that, you got an engineering package, you put your engineering team together and went out and proposed a solution for the site. You submitted the proposal that was both a technical proposal and a financial proposal. You got feedback within a month or so, did you win or lose, and you learned from the losses and from the wins. Then you had to execute, and you saw the project completed and a new piece of property able to be used by someone. I enjoyed that.
Right now, being part of the company across North America, and seeing the great leaders, and seeing the great future, is by far the best job I've ever had. But that was fun times, seeing solutions come to fruition fairly quickly.
Where most of what we do out of a corporate office in a Fortune 200 company today, you're starting a safety initiative, or cameras on trucks, or onboard computers, or a sales model change, and it's a lot of time to roll it out and see it to fruition.
Right, and it's never-ending.
TREVATHAN: It's never-ending, but that's a good thing ... There's always opportunity for improvements.
What's next for you? Will we see you join any company boards?
TREVATHAN: As I get here a few months away from retirement, I've got a couple people that I'm talking to about that opportunity. We'll see ... I love the fact that I have been on the operating and customer side of our business, and many boards are looking for CEOs, but I got a couple that are looking for someone with customer experience, and operating experience. We'll see if they pan out.
Lot of good plans with a wife of 46 years ... I've got 10 grandkids that I'd love to spend more time with. We snow ski and water ski and vacation and hike mountains together, and I want to do a little more of that. I go to about every little league, or soccer, or dance recital I possibly can, and I'm going to have more time to do that.