By Jenny Ruth
Tuesday 30th March 2004
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SC: So many New Zealand companies have lost money in Australia. Why should WAM be any different?
Waste Management managing director Kim Ellis: It's a little unfair that there's been a focus on one or two high profile businesses that have had some difficulty. There are probably hundreds of companies that are doing well over there. a lot of them aren't listed like Fulton Hogan. Fletcher Building and Nuplex have been successful - Nuplex has had one hiccup, but their core business is roaring away. It's inevitable that things tend to be tough over there. The nature of our reporting system is you have to report discretely. If you go over there and have one truck, you still have to report it separately. If we went to Dunedin and developed a new business, you would never know how we were doing. Everywhere in New Zealand it's taken two or three years to get up to full speed. In addition to that, when we and other companies go into Australia, we leave behind us a pretty integrated business with 20 years of intellectual property, all your contacts etc. When you step in off the drawbridge, you inevitably have a weaker start.
SC Is it true that you've never done a bad acquisition?
KE: We've done about 45 in the last 12 or 13 years. We've taken some time to get things up to speed from time to time. We've had acquisitions that have earned less than their cost of capital and it's taken another acquisition to ram it into place. A key part of management, if you're any good, is how you recover from a difficult situation. We've never had a negative impact on earnings, but I wouldn't say they've all been perfect. Our proposals get a very tight rule over them from the board and from myself.
SC: Aren't the Adelaide acquisitions much bigger than the "bite sized" acquisitions you talked about when the company first went into Australia?
KE: They have all been under $15 million. A start-up landfill isn't really an acquisition. There are four or five pieces to the Adelaide acquistions. There's no $40 million smacker there. Each one is a separate part. It spreads the risks quite materially. We've never had anything that, if it failed, it would put the whole company at risk. It will happen one day, we will find something a lot bigger.
SC: With only 50% of capacity accounted for in Adelaide, is it a bit of a "build it and they will come" type strategy?
KE: Investors like to see us paying a heap of goodwill for a business with an established customer base and you pay someone else for getting you all that stuff. You make a lot more money if you grow more organically. That's what we've done in New Zealand. I think we've done extremely well to get, at this early stage, half the market locked in, given that nothing happens for another nine months. I would expect by the time of opening we would have picked up another 30%. By opening, the major collectors want to know where they're sitting in terms of disposal arrangements. The remaining 20% of this is floating, the mums and dads and casual customers. We will only ever get 70% to 80% of our business contracted.
SC: Why did it take so long to exercise the Adelaide option?
KE: We renewed it three times. We got the option because we knew that the councils were putting a tender out as a group. We weren't sure at that stage what our approach would be towards those councils. We didn't know whether we wanted to be in bed with them or have nothing to do with them. We made a call to jump into bed with them and we felt we would be stronger for that. We felt that was quite a good political move as well. We then locked ourselves into a political process. When you have upwards of 12 councils, each of them has to make up their minds. Typically in the political process, everyone hates everyone else etc. they've also got due processes to go through. We made it in the end.
SC: What impact will the Kate Valley landfill have on sales?
KE: The ownership is 25%, but ourselves and Envirowaste have a joint venture, Canterbury Waste Services, which represents 50% of the total. The 50% that's privately owned has the responsibility for building and operating the landfill and hauling the waste and, in addition, are free to build and operate their own transfer stations. In each of those activities there's a profit margin when all the costs are accounted for. It's a lot better than 25% and it's a long-term secure income stream. It isn't about revenues, it's about what level of profitability we're going to get. What goes to the revenue line is our share of the profits. There are 300,000 tonnes going through the system. The gate rate is around $90 net of a levy put on by council. That's the gross income coming in. Part of that is going to be carved up into our own transfer station. It's a pretty useful contribution.
SC: Back in 2001, you were talking about expansion into Britain. Is that off the agenda now?
KE: It's off the agenda. We had the choice of staying here and getting into something else that maybe used the same skill set or we stayed with the business we knew and went off into another market. While it may be obvious that we should go to Australia, there are big players there. We didn't know whether we could get any substantial business started there. If you ask, where else is there an English-speaking, Western style of government, they get pretty thin on the ground. The UK is a fairly easy call behind Australia. We knew the industry there from our previous association with (US-based and former major shareholder) Waste Management and it's in a huge state of flux. It is a hell of a long way away. If the major players in Australia decide to stay there in the long term, in two or three years time we will be saying we're not going to get more than $100 million in revenue and we will have to put the UK back on the drawing board.
SC: How do the small liquid waste acquisitions you've made in Australia fit in the overall picture of the company? (One fund manager described them as non-core)
KE: It's a fair question and fair comment. Those businesses owe us in the order of $40 million. I wouldn't say it's too small, if you look at it as an aggregated business. The question really is how far do we want to take that arm of the business and will it stay neck and neck with the dry waste arm. It has a lot to do with opportunity. Some of it will be determined by chance and some by deliberate strategy. We're still getting our heads around that now but I don't think you should under-estimate the importance of that business.
SC: Where and what are you looking at in Asia?
KE: One of our directors, John Cimino, calls it an option of the future. What we're doing in China is getting our toes in the water. We've found two or three parties who are happy to put their money into the Chinese system and who want to grow and environmental business alongside their existing business. We want to target operating contracts rather than owning. We don't want to just be consultants.
SC: You commented that Redvale achieved acceptable returns for the first time in a decade. Aren't the returns likely to continuously increase from here?
KE: You're quite right. Redvale was particularly so. It was very high front-end loaded, $60 million so far. Chasing our risk-adjusted cost of capital off that, say 10% -- we never regarded it as high risk - we haven't hit that target until this year. That's about pricing. When we entered the market in 1993, it was a local government monopoly and pricing was comfortably high, in the order of $60 a tonne for everybody, no deals. Prices went straight down to $30. They tried to contract all the major players to stop us from getting going. What kept us afloat was our own fleet.
SC: You've achieved some pricing increase in Auckland. What's the outlook for pricing?
KE: The pricing range is probably from $30 for remediation work right through to $70 or $80. With Fulton Hogan and Hampton Downs, they now have a big capital sume they've invested but also have to ship the stuff out of town. The cost pressures they're having to cope with to get a return (mean) they have to push their prices up. We can either run them out of town or say, this is pretty good. We've got nine years of earning less than our cost of capital to make up. We need to make it pay over the next few years. I think we've had the big leaps coming through in the last two years. This year's and probably next year there will be useful price increases. The facility will be in place by the end of next year. You will probably see it stabilise then. It will probably be better than inflation, but you won't see the 15% and 20% that's been happening.
SC: Is Waste Management a takeover target?
KE: In theory yes, in practice no. I've always subscribed to the particular view that because of the performance and the confidence that will continue, we have multiples on our earnings that are a lot higher than those which occur when transactions take place in the waste industry.
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