After Waste Management (NYSE:WM) reported its second-quarter results, its leadership team shared some important information with investors during the subsequent conference call. Here are the key takeaways for long-term shareholders.
1. The business is performing well despite unfavorable movements in commodity prices and foreign exchange:
In the second quarter, we earned $0.67 per share, an increase of almost 16% from the second quarter of 2014, excluding the earnings from divested businesses and assets. Our net income, operating income and margin, operating EBITDA and margin, and earnings per diluted share all improved when compared to the second quarter of 2014, despite year-over-year headwinds of $0.03 per diluted share from lower recycling commodity prices and the unfavorable impact of foreign currency fluctuations.
While revenue growth remained a challenge, with sales (after adjusting for divestitures) declining 1.5% year over year to $3.32 billion, Waste Management was able to boost profits through price increases and cost reductions.
2. Management's strategy is to remain disciplined on pricing, even if that means sacrificing some volume growth.
Our pricing programs continued to be a big part of our earnings growth and margin expansion, and our strategy remains the same: Continue our focus on core price, while selectively adding the right new volumes.
Core price, which consists of price increases and fees, rose to 4.1% in the second quarter, a 10 basis point improvement from the year-ago quarter. Management believes that core price is a better metric than yield as an indicator of the company's true pricing activities, since core price is not affected by differences in service mix in the same way as yield. And in that regard, core price demonstrates Waste Management's pricing power, with core price remaining above 4% over the last six quarters.
3. Volumes declined again but also showed signs of stabilization.
With respect to volumes, we look at our traditional solid waste business volumes, which excludes recycling and non-unit or non-solid waste revenues. Our traditional solid waste business declined 0.6% in the second quarter of 2015 versus a decline of 2.3% in the second quarter of 2014, 170 basis point year-over-year improvement and a 60 basis point sequential improvement from the 1.2% decline in the first quarter of 2015.
Overall volumes, which includes recycling and those non-solid waste volumes, declined 1.3% in the second quarter, compared to the negative 3% reported in the first quarter of 2015, a sequential improvement of 170 basis points.
Although overall volumes continued to be negative, there were several areas that demonstrated favorable trends, such as Waste Management's industrial business, in which volume improved by 270 basis points from negative 2.7% in Q2 2014 to flat in the second quarter of 2015, even in spite of sharp price increases. That's a positive sign, and management expects volumes to strengthen through the rest of 2015 and into 2016.
4. Recycling remains troublesome.
Turning to recycling, as you heard us saying many times, the current recycling model is broken, and we and the entire industry need to fix it. We have seen progress in our recycling operations, but the issues are complex, and it's not an overnight fix.
We are also working together with our customers, vendors, and industry groups, and we have made progress as we are finding some acceptance for better contract terms and higher fees to offset the higher processing costs that we are experiencing.
We are working with customers and municipalities on educating the public on what and how to recycle to bring down contamination levels and on the true cost of recycling. We and our entire industry realize that recycling is the right thing for our customers and the environment. We need to make sure that it's not only the right thing to do, but it's also a sustainable business.
Waste Management is trying to offset the negative impact of lower commodity prices by shedding unprofitable recycling contracts and reducing operating costs. The company has also implemented an educational campaign to inform customers as to what should and should not be recycled. If Waste Management can make progress in that regard, it will likely benefit both shareholders and the environment.
5. Waste Management continues to turn trash into cash for its investors.
We also saw our business generates significant cash, as our cash provided by operating activities increased 47% and our free cash flow grew 30%. We are pleased with these results, and we expect the positive momentum to continue to build through 2015 and into 2016.
Waste Management's excellent free cash flow generation is a boon for shareholders, who continue to be rewarded with rising dividend payouts. Looking ahead, management plans to use a balanced approach toward allocating capital to include acquisitions, shares repurchases, and further dividend increases. Done prudently, that combination should help to deliver a solid mix of income and share price appreciation to Waste Management's investors in the years ahead.
Joe Tenebruso has no position in any stocks mentioned. The Motley Fool owns shares of Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.