There’s more than a shred of truth to the phrase “one man’s trash is another man’s treasure.” In this instance, the other man is Waste Management CEO David Steiner, whose company turns waste of all kinds into renewable energy and valuable recycled commodities. Waste Management operated 269 active landfills and 114 recycling facilities in 2012. It processes more than 12 million tons of recyclable materials alone. Fortune’s Adam Lashinsky interviewed Steiner, who has been the CEO for nine years, to discuss the challenges of recycling, China’s environmental footprint, renewable energy, and the future of garbage. A lightly edited transcript follows.
Fortune: Just to get things started, if you could give an overview of the company: Where are you, how big are you, who are you?
David Steiner: Yeah. So we do basic solid waste services throughout the United States and Canada. So when I say basic solid waste services, we’re talking about recycling, we’re talking about waste-to-energy, and then we’re talking about all sorts of different types of collection and disposal for — all the way from your household to big businesses to small businesses. We’re covering them all, about 22 million customers throughout the United States and Canada.
And then about five years ago we went into waste-to-energy internationally. So what you’ve got is China has two problems: not enough electricity and a lot of garbage. What’s the best solution? Burn the garbage to create electricity. So we have a joint venture in China where we’re building waste-to-energy plants. And then we’ve got another joint venture in — predominantly in England, but throughout Europe where we’re building waste-to-energy plants.
So when you look at it, we’re about 10% of our business is recycling, about 10% of it is waste-to-energy. Those two are growing faster than anything else we do in our business. We’re seeing growth rates on recycling in our business at about 15 to 20% a year. We’ll see that same kind of growth rate in waste-to-energy.
When you say growth rates, do you mean by revenue, or do you mean by unit collection or volume collection?
Both. And so we’ve got a goal to collect 20 million tons of recyclable by 2020, right? When we first set that goal, we were at about 5 million tons. We’re now at about 13 million tons. So we’re well on our way to getting to that 20 million ton goal. You know, when you think about it, look, there’s really only one thing that we do: We meet the environmental needs of our customers. So everything we do, we start with our customers, right? And our customers increasingly want something different to do with their what I call — you call waste, I call materials. They want something to do with those — different to do with those materials rather than putting them into a landfill.
Now, you know, when you put it into our landfill, generally what we’re doing is we’re creating energy out of that landfill, so it’s not so bad to put it into a landfill. But the conversion rate on that is probably only, you know, 10 to 20%. If we could take that material and create — take it into a waste-to-energy plant, now you’re getting more like 70% conversion of the BTU content. Recycling, obviously you’re getting close to 100%.
About [five] years ago we moved into waste-to-energy internationally. Pretty difficult to do collection, go back into collection internationally. You really don’t get a lot of big synergies, right?
Collection means picking up garbage, right?
It means picking up garbage with a garbage truck. And it’s hard to get synergies internationally, right? I mean, in other words, you have a bunch of trucks in the United States, a bunch of trucks in Europe. You can’t have fewer trucks so you can’t really get synergies by going into that way. But what we saw was there’s a big growth area in waste-to-energy in China and Europe.
And that’s because that’s a technology business. Is that why you can have synergies?
Yeah. It’s a technology business, but it’s also a very discernible plant, right?
And so it’s basically a manufacturing plant, if you will, so not a lot of moving pieces. And so that’s why we did it internationally.
But before we go too much further, and at the risk of getting too icky too quickly, what other kind of waste is there besides solid waste?
Oh, well, you know, by the way, none of it’s icky to us, right?
It’s all good stuff.
It’s all money, right?
It’s all money, and it’s all materials, right? And so basically what we’ve done in the last five years is tried to say, “Okay, that icky stuff that you put, that businesses put out, that everybody puts out, what is in that icky stuff, and how can we take it and make something out of it that either produces energy or turns it into a specialty chemical or turns it back into its constituent parts, like oil, or recycles it, right? And so when you look at — when you think of solid waste, you think of the stuff that you put out every day.
The thing I put in my garbage can.
The stuff you put in your garbage can. You know, a lot of people will separate that into organics, into recyclables, and into solid waste. Our goal, our ultimate goal is to be able to say, “Look, when you have to recycle it, I mean, when you have to separate it into three or four different bins, what does that mean?” That means you have to do a lot of work.
Right? And there [are] plenty of places where folks aren’t doing that type of work. But guess what else has to happen? Now you have to send four trucks to pick up those four different bins, and that is not a great environmental footprint. So what we’ve been trying to do over the last five years is trying to find a way to say, “How can you put it all in one bin; we can then take it and do something with it?” So about 20 years ago we started into single-stream recycling. Remember when you and I were younger, we had to sort of separate it, right?
And that drives down recycling rates. We did single-stream recycling, where you can put it all into one bin, and then we separate it using technology. So you can put glass, you can put cardboard, you can put all the different recyclables in that.
And how efficient is that technology?
The technology’s fairly efficient.
I mean, are you talking 99%, 98%?
Yeah. Well, when you’re dealing with recyclables that you have separated at home, so you’re not putting organics in there. That’s the biggest problem.
So assuming I’ve done a fairly good job, is that the —
Yeah. If you’ve done a fairly good job, we’re talking 90 to 95% recovery rate.
Interesting. I want to ask a societal question. When I think about garbage, I can’t get out of my head that iconic episode of Mad Men when they’re leaving the picnic ground and Mrs. Draper, you know, picks up the blanket and throws the trash into the side of the — of the shrubbery and they go their merry way.
That was how we behaved in the United States in the ’60s. How much have we left that bad time behind us and how much progress do we still have to make in terms of being sustainable, I guess would be the right word?
Well, you know, it’s interesting. Whenever I talk to folks — I grew up in the Bay area — and you know, if you live in the Marina district in San Francisco, guess what you’re living on? You’re living on an old landfill.
The Back Bay of Boston, I mean, you’re basically living where for hundreds of years, folks disposed of their waste. And by the way, most of that waste was fairly organic, and so it’s not harmful. Where we started to really get into trouble was when the industrial age happened and you started using chemicals, right? That’s when you started seeing the contamination of the water.
So you’re saying throwing the remnants of the picnic, while ugly, wasn’t terribly dangerous.
There’s nothing in there that’s going to harm anyone, right? I mean, if you’re throwing away banana peels and a half of a tuna sandwich, you’re not going to harm anyone, right?
And so for hundreds of years, that’s how folks did it. And frankly, it wasn’t so harmful to the environment.
Once you start throwing batteries in there, once you start throwing electronics in there, now you’ve got problems, right?
And so for us, it’s about, okay, let’s take each of those streams and let’s understand what to do with them. You know, I didn’t grow up in the garbage industry. I joined Waste Management in 2000, and I had never seen a landfill. What I thought happened to waste was my version when I grew up in the Bay Area going to the dump, right? And we went to the dump, and we dumped everything we had in a truck into the dump, and you saw the sea gulls flying around, and that was my idea of what happened.
Now, I grew up near a facility in the Chicago area called Mount Trashmore —
— where they built a ski mountain out of trash. So I was very familiar with this.
And we have — we actually have a closed landfill in Chicago that’s a golf course.
Settler’s Hill. And so in any event, the first time I went to see a landfill, we were driving along for about a half mile, I said, “Well, where’s the landfill?” And they said, “Well, you’ve been on it for the last half-mile.” And so what folks don’t understand is the amount of technology that goes into just your basic landfill. So first off, you find a good geology, somewhere where you’ve got good separation of the ground water, layers of clay, right? So that there can be no seepage into the ground water. And then you put synthetic liners on it. So you’ve got different types of barriers, both natural and — organic and synthetic, that protect all of the garbage from getting anywhere near the ground water. And so that icky stuff that you have, if you put it into an environmentally safe landfill, then it’s never going to touch the environment.
But then you’ve got to understand what those things [are] that you don’t want to take the chances with, right? You know, the United States still isn’t very good on separating out the really harmful household things, like paint, like batteries. I mean, there are still a lot of people that despite what the law says, will put that into garbage. So you’ve got to understand that you can’t just take it and create the Back Bay of Boston again. You’ve got to keep it separate from the environment.
Now, as a company, you have a stated goal that you want to make things — especially energy — from the garbage that you collect, and you have very big aspirational goals to do that. But right now, you’re still in — you still get most of your revenue from collecting and then processing garbage.
And can — as a society, is it realistic that we’ll ever get to a place where Waste Management as a company is mostly doing other things with the stuff that it collects?
Oh, I think you absolutely will. And so, you know, that icky stuff that you and I both call garbage, over the last five years I’ve started to realize it’s materials, right? And so that stuff that you put into the garbage every day, we took a look at it and said — just the stuff that we collect, right, the stuff that we collect and we put into landfills — “If could take it and separate it and get clean product out of it, what could we do with it?” And we could sell it for about $12 billion. So we’re taking $12 billion of cash every year and burying it into a landfill. And so forget about anything other than the economics of it, economically —
Let me interrupt you, though. You are trying to sell that stuff, right? So I don’t understand the 12 billion figure. That’s — this is theoretical?
That’s theoretical. If we could separate it. See, the issue with garbage is that everything that you put into the garbage has some value. Whether it’s organics or plastic or aluminum, cardboard, it all has value. But once you cross-contaminate it, it loses its value.
I see. Uh-huh.
So for example, your pizza box, right, when you take your pizza box and you recycle it, as soon as that grease from the pizza box gets in that cardboard, the cardboard can’t be recycled anymore. It can’t be efficiently recycled anymore. And so the problem is the cross-contamination of the various waste streams, right?
And so you’ve either got to do one of two things. You’ve got to say to folks, “Do everything you can to keep this material pristine, separate it for us, and give it to us.”
Never going to happen, right? I mean, you can’t really get consumers to do that much for you.
Right. People have other things to do with their time.
Exactly. So we’ve got to do one of two things. We’ve got to understand how we can separate it and get value out of it, and that’s what we’re doing with single-stream recycling plants.
But ultimately we’ve also got to figure out what can we do with that commingled stream and create value out of it. So for example, in San Antonio, we’ve taken that commingled stream and we’re creating pelletized fuel out of it. Pelletized fuel, I can give you a [British thermal unit] content of between 7- and 13,000 BTUs, which you can’t do when you’re mining coal, right? I can also give you a pellet that will burn like coal, burn at the BTU of coal, at about 10% of the particulates. So when you talk about clean coal, the cleanest coal you can have is pelletized fuel from waste.
Is this an example of what’s known as upcycling?
Exactly right. That’s exactly right. And what I’ve realized over the last 18 months is that we’ve invested a lot of money on the conversion side of materials, right? The problem is when you convert, other than things like we can do it with pelletized fuel, but other than that, you’d basically have to have a homogeneous stream. And so we’ve now got to move down and say, “How do we separate it? How do we find different separation technology that can allow us to separate it into homogeneous steams?” So whether you’re taking plastic bottles and turning them into oil or waste and turning it into pelletized fuel, or turning it into specialty chemicals, you’ve got to get the proper type of stream. And so the separation technology becomes very important.
Let’s come back to the present day. You have a robust business where you collect recyclables that are commodities and you sell them and you make money on that.
In your most recent quarter, you were hurt by the fact that commodity prices for recycling are down.
Why, and what is it that we’re talking about?
Yeah. So mainly what we’re talking about when we talk about recycled commodities is fiber, right?
So, cardboard, newspaper, and office paper.
Okay. All right.
Right. And so when you think about it, so let’s —
As a newspaper reader, I contribute a lot to that.
Correct. You contribute a lot, but there’s not as much of it being generated anymore, right?
My kids have never opened a newspaper. I read a newspaper every day.
My kids have never read a newspaper.
I know. That’s sad.
And so, you know, the newsprint that we’re recycling, there’s not as much demand for it. Obviously when there’s not as much demand, the price drives down.
The other big one is cardboard. And cardboard — you’ve got a lot of domestic mills, but a good percentage of it goes over to China. So what happens is the Chinese mills make the boxes in which they ship the goods to the United States. We then ship back the cardboard so they can make more boxes to ship more goods to the United States, right? And you’ve seen a slowdown in China. So you’ve seen a little bit less demand there. So demand for the recycled commodities has been down; hence, the price being down.
So your financial results and the softness that you’re seeing in commodity prices on cardboard is a direct comment on the Chinese economy you think.
No doubt about it.
And what’s your forecast on that?
You know, that’s a great question. So what happens is right now in China the mills start to ramp up production because when you think about it —
When you say right now, do you mean this stage of the year?
This stage of the year. Because everything is driven by Christmas, right?
And so, you know, the goods that they’re going to be moving that are going to get onto the shelves at Christmas [are] moved during the summer. It’s moved basically from July to September.
And so right now, so we’re at the front end of that production, right?
They need to have the boxes in order to ship. And so what you see is in the summer months, you start to see the real demand come from China for cardboard. So we’ll find out in the next three months really what’s going on with the economy both in the past and looking forward. We’ll see how much demand there is for the cardboard.
So the key metric there wouldn’t necessarily be how you do quarter to quarter, but year over year, right?
You will have a fascinating pure-play projection on the U.S. Christmas season, I would guess.
[Laughs] That’s true, you really will.
I mean that. And all the energy that goes into forecasting the holiday shopping season.
Yeah, you really will. You really will. Let’s hope it’s a good Christmas.
Of course. We all hope so. One other financial issue that you discussed is that you are — you intend to raise landfill prices across your system —
— by 5 to 7%, which strikes me as a large number. Is it difficult to make landfill price increases stick?
Well, so let’s talk about why to do it, right? The landfills are by far our most capital intensive asset. We spend 4-, 5-, sometimes 600, but generally about 4- to $500 million in capital on our landfills every year. We look at seven [unique] lines of business in our company: commercial collection, industrial collection, recycling, different phases of the businesses. The landfills are our lowest return on capital. Very high incremental margin, but a very low return on capital. And so what you’ve seen is that the cost of building the landfills has gone up dramatically. The cost of permitting the landfills has gone up dramatically. And the cost of maintaining the landfills. So when we maintain a landfill, we put a huge piping system, both for water and for gas throughout the landfill. Obviously takes a lot of money. But then we’re taking the methane gas out of the landfill and we’re creating energy out of it, right?
And so the capital intensity of these landfills is huge: 5 to 7% doesn’t get us anywhere near the return on capital of the rest of our lines of business because we’ve been averaging more like 1 to 3% for the last 15 years. And so we’ve got to do something to turn that business around to get a higher return on capital. So the 5 to 7% price increase, the question is can you do it, will it stick? Don’t know, but we’ve got to do it if we want to maintain that return on capital with our landfills.
But don’t you have many long-term contracts where a price increase this year is not even on the table?
Absolutely. Yeah, no doubt about it. So the average landfill contract is about three to five years. And so we’ll do them as the contracts roll up, and so, you know, we’re not looking to doing 100% this year. My guess is it’ll be more about 20 to 30% of the stream.
In the United States, what percentage of the garbage collection and landfill business is corporate, like Waste Management vs. non-corporate would be the only other way I would know how to ask the question.
Yeah. So, it depends on what type of — what you’re talking about. So basically municipalities are generally involved in picking up household waste, right? The percentage, I can’t give you an exact percentage, but I’m going to guess that the percentage that they do is probably 15 to 20% of the country.
— oh, yeah. Because what they find is that they’re very inefficient, right?
I mean, like most —
They own three garbage trucks. They’re just not really getting the job done, right?
Yeah, exactly. And so more and more you’re seeing cities privatize. And then you’ve also got cities and other municipalities, counties, that are in the landfill business. So generally what they’ll do is they’ll have a landfill for their community, right? And so all the waste from their community goes into that community [landfill]. That’s probably another — on the landfill side, that’s probably another 10 to 15%. So, you know, there’s times when we work with the municipalities. We’ll use their landfill if they have a landfill locally. There’s times we work with them by helping them to privatize their system. And then there’s other times we work with them where if they’re doing collection, we’ll do recycling, we’ll do a lot of different things for them. So you’ve got — mostly what you’ve got is a partnership with the communities that we serve. I don’t view them so much as competitors frankly as partners.
And opportunities, I would think, in some cases.
Yeah. You know, [with] privatization, everyone thought that when municipalities got into problems that they’d start to privatize a lot of their different services, and I don’t doubt that they will. But when you think about it, generally what they’re going to privatize are things that are a little less visible, right? And so if you’ve got city hall and you can sell city hall and lease it back, you can get easy money there, and none of your consumers are affected. If you can privatize the water system or the sewer system, you know, generally your consumers aren’t going to be affected. You privatize garbage, that’s something that comes to everyone’s house every day, and so I think that, you know, as far as privatization goes, that’s one that they sort of look at last, but I will tell you it’s probably the one that they should look at first. Just from an efficiency point of view and from a capital return point of view it really is. It really makes a lot of sense because generally we can do it faster and cheaper, and that’s the best way to help your community, right, is to find someone that can do it faster and cheaper.
Where in the United States are you not [present]?
[Laughs] Wyoming and Montana.
Yeah. I was —
Only two states you’re not in business [with].
Yeah. And I was in Jackson Hole, Wyoming, a few years ago, and I saw a garbage truck go by, and I said, “My goodness, that’s a Waste Management garbage truck. You know, we don’t have any business in Wyoming. That’s surprising.” And I looked closer at it, and it was an exact replica of a Waste Management truck, but instead of the WM on it, it had MW, Mountain Waste.
Did you sue them?
And — no. I went back and I asked our folks at the corporate office, I said, “What’s that all about?” And they said, “We sold to Mountain Waste a few years ago, and I guess they didn’t repaint the trucks. They just turned the M and the W upside down and called it Mountain Waste.” [Laughs]
And so you’re in 48 other states, but you’re not in every big city, right?
We’re not in every big city, but we’re in virtually every big city.
Very last question. Tell me about your non-management work force. How many of them are there, and are they unionized?
Yeah. So, you know, we start with the drivers, right? I mean, you know, I tell everybody, my brother was a fire fighter for many years, and he was known as Joe Steiner, the Fire Fighter, right? In 2001, he became Joe Steiner, Hero, right, because of September 11th.
Yeah, first responder. I never heard that expression before 9/11.
Exactly. And the way we look at first responders has changed since September 11th. You know, I like to say our guys on the front line don’t get the credit they get. They’re still known as Joe the Garbage Guys, right? But think about what would happen if they didn’t show up to work every day? It’s really — they truly are the heroes. And so when you look at our drivers, we will run about 20,000 routes every day, so we have about 22,000 drivers. They’re about 20% unionized. So, when I first joined the company, we were about 32% unionized. We’re about 20% unionized now because we’ve done a spectacular job of helping our union employees understand that, you know, being non-union can actually be better for you in virtually every circumstance, and so we’ve actually gone from being about 30% union to about 20% union in the 10 years I’ve been here.
What’s an example from your perspective [as] the CEO of how an employee would be better off not having union representation?
Well, it’s two things. It’s health care and it’s retirement, right? So when you look at health care, generally — and look, we have great relationships with the unions. There is a need for unions. There’s —
You have great relationships, but they can’t be too happy about a 12-percentage point decline in union representation.
Well, you know, when you think about what’s best for the worker, they should be happy about it, right? Because basically what we’re doing is we’re taking health plans where we could be more efficient, right, and we’re getting better health plans. And we’re getting retirement plans where we can be more efficient, and we’re getting better retirement plans. You know, there’s been a lot of discussion from UPS to one of our competitors, Republic, about the Central States pension that is basically bankrupt. And so you’ve got workers that long term may not see the money that’s been put in for them. We got out of Central States a number of years ago. We took a very concerted effort to say, “We don’t — we want to make sure that our employees are going to get the retirement they deserve, so we need to get out of the insolvent plans and get them into a plan where we can guarantee that they’re going to have a good retirement.” So, generally when we’re winning those union campaigns it’s because we’re providing better benefits from a health care point of view and from a retirement point of view.
So better health care, better retirement, lower wages?
No. No, not lower wages. You know, we do a very good job of making sure that we treat our non-union employees as good or better than we treat our union employees. So generally what you’ll see is that our folks — you’ve got to look at the total compensation package, right? Our non-union folks total compensation package, I would stack it up against any union worker in the United States.
By the way, you reminded me of one other thing I’m curious about. I haven’t been to China in 20 years. The last time I was there, they were burning garbage everywhere —
— and just releasing it into the air.
Are they still doing that?
You know, it’s interesting when you go to China. There’s really two Chinas, right? I mean, everything that is built new in China is built to world-class standards. And so I was over there with our waste-to-energy folks and our first — we commissioned our first waste-to-energy plant. And they looked at it and they said, “We could only dream about having something like that.” Because our plants in the United States are generally about 20 years old, right? And so I also went and visited some paper mills in China because they buy a lot of our recycled fiber. And it’s incredible how clean they are, and the water discharge from them, you can drink it. I mean, it’s incredible —
I may not want to, but I believe you.
— how state-of-the-art they are. But, you know, the thing that China has is that they’ve got a huge infrastructure that they have to support. And so until they’re able to build everything new, they’ve got to do things the old way, right? I have not seen any area where they’re open-air, mass-burning waste. But, you know —
So you’re not — you don’t — you’re not smelling garbage in central Beijing.
Because I did 20 years ago.
Well, that’s manufacturing. Yeah, that’s — right now, what you’re smelling are the manufacturing plants, the older manufacturing plants, right? You know, look, when you think about China, they have a huge issue on how do you support that many people and that kind of growth rate coming into the cities. And I believe their politicians understand that, you know, look, it’s not about anything for them other than a social issue. If you have dirty water, you can’t have crops that feed the community, right? And so what I’ve seen over in China is that they’ve gotten very serious about environmental regulation. The problem is they can’t just flip a switch —
— and have everything be completely clean today because they’ve got to support that old infrastructure, right?
So as they replace that old infrastructure, you’ll see it get better and better. But obviously that’s going to take some time.
Very good. Thank you.
A shorter version of this interview appeared in the June 10, 2013 issue of Fortune.