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HOUSTON — Waste Management, the nation's largest trash hauler, said Thursday its second-quarter profit dropped sharply due largely to falling recycling and energy prices.
Net income totaled $247 million, or 50 cents per share, down 22 percent from $318 million, or 64 cents per share, last year.
Results included 2 cents per share for restructuring charges and the Houston-based company's withdrawal from a pension. Earnings would otherwise have been $256 million, or 52 cents per share.
Analysts surveyed by Thomson Reuters expected the company to earn 54 cents per share on revenue of $3.02 billion.
Revenue for the quarter ended June 30 fell 15 percent, to $2.95 billion from $3.49 billion a year ago.
Shares shed roughly 2.5 percent in midday trading.
Waste Management said it expects to earn between $1.95 per share and $1.99 per share this year, falling short of the $2.02 per share analysts expect.
CEO David P. Steiner said the company expects the rate of volume declines in the second half of 2009 to be consistent with the second quarter.
Waste Management said it will resume share repurchases, saying markets have stabilized and its cash flow and balance sheet are strong. The company, which suspended buybacks in July 2008, said it has authority to spend up to $400 million during the remainder of the year.
The recession has taken a toll on Waste Management as businesses have cut back on garbage removal and less construction site debris is hauled away because building activity has fallen. The company also has been hurt by a deterioration in the market for recycled materials as some paper manufacturers use less recycled materials in their pulping process.
Steiner said conditions are improving, however, and the company expects to see "more modest" negative year-over-year impacts from recycling in the second half of the year.
The price of recycled materials soared before the start of the recession in December 2007 and began falling last year along with the economy. Recyclable materials such as corrugated paper, office paper, newsprint, plastics, glass and metals are less in demand as end users such as paper manufacturers using recycled paper in the pulping process struggle with shrinking markets and cut back on buying recycled materials.
Waste Management's waste-to-energy subsidiary, Wheelabrator Technologies, felt an unexpected hit with falling natural gas prices. More than one-fourth of Wheelabrator plants sell electricity to power grids and the price has fallen in line with natural gas prices, a spokeswoman said.
However, Waste Management's commercial and residential trash removal businesses showed "recession-resistant qualities," Steiner said.
Commercial revenue declined only 1.3 percent in the quarter compared with the same period last year, he said. That excludes revenue from a fuel surcharge imposed when prices skyrocketed, driving up the cost of gas used for garbage trucks.
Residential revenue, excluding the fuel surcharge, declined 0.5 percent in the quarter.
Volumes fell more sharply in industrial collection and landfill businesses, though the declines appear to be stabilizing, the company said.
"We performed well in the second quarter, despite continued weakness in volumes and unexpected weakness in natural gas markets, which adversely affected the sales price for electricity from some of our Wheelabrator plants," Steiner said.
Waste Management also said it has begun seeing the benefit of a reorganization it announced in the first quarter and is "on track" to cut annual costs by more than $120 million.
Steiner told investor analysts in a conference call that Waste Management is seeking to change pricing contracts with recycling customers to "moderate the future effect of swings" in prices. The new approach is intended to cover processing costs plus earn what Steiner said will be a fair return on capital.
Changing the price structure — offering rebates to customers when recycling material prices rise — will help shield the business from fluctuating cyclical commodity prices, he said.
Steiner also said Waste Management's drive to increase its medical waste business will continue, "but at a slower pace" after its loss to Stericycle Inc. in May to buy privately-held MedServe Inc.
He said Waste Management, which is seeking to broaden its business in the medical waste industry, was to have spent up to $200 million for the acquisition and offered $175 million. Stericycle said it offered $185 million in cash, which would be subject to reduction of MedServe's debt at closing.
Analyst Michael E. Hoffman of Wunderlich Securities said Waste Management surprised analysts with the financial problems related to Wheelabrator, which has until now been a steady source of revenue and earnings.
"With the core solid waste business, you couldn't be happier," he said.
However, the cut in income due to Wheelabrator's problems is "the part the market is going to struggle with," he said.
"Shame on us," Hoffman said. "We should have been paying attention."
Shares lost 73 cents, or 2.5 percent, to $28.74.
