If waste management firms see a bright spot in today's extraordinarily deep recession, it is the residential collection and disposal side of the industry, the one segment that typically remains reliable during economic slowdowns.
When the economy slows, so does construction in the housing, commercial and industrial sectors. Less construction work means less construction and demolition (C&D) debris for waste firms to handle. A flagging economy reduces retail store sales and inventories as well as restaurant business. That cuts into the roll-off component of the waste industry.
The recycling business goes haywire during recessions, too. Prices paid by end users collapse to levels that make it unprofitable for waste companies to collect recyclables — though their contracts dictate that they must continue collecting.
Residential waste is what is left. During recessions, families stay at home for meals instead of dining out. They attend fewer events. Instead of going to the movies or to the amusement park, they stay home and watch videos or play games. And they continue to produce trash — sometimes, they even make more trash than normal.
The Residential Annuity
“Residential waste is kind of an annuity,” says Tony Rosback, vice president for operations support with Phoenix-based Republic Services, the nation's second largest waste management company. “When there is a downtick in the economy, the residential line of business tends to be more stable than the commercial and industrial businesses.”
Peoria Disposal Co. in Peoria, Ill., has used its relatively healthy residential business to prevent lay-offs. “We've had a lot of acquisitions this year,” says Matt Coulter, vice president and sales and recycling manager with Peoria Disposal. “And we've absorbed the new residential routes with current employees and kept people working.”
Some companies may even foster growth by in a bad economy by taking good care of residential customers. Jacksonville, Fla.-based Advanced Disposal Services, a nine-year-old $275 million company, held around 110 franchises at the beginning of 2008, when the economy began its decline. According to Mary O'Brien, the firm's chief marketing officer, Advanced Disposal won 10 residential contracts with cities and counties during 2008. So far this year, the company has signed nine new local government contracts. Overall, the contracts range from $19,000 per year to $6 million per year.
This is a strange recession that has created some unusual problems. For instance, prices and costs usually go down during a recession. But in this recession, waste firms' costs are soaring — and they're raising prices as a result. “You wouldn't think you could [raise prices],” O'Brien says. “But we're seeing residential prices increase for subscription business and even in competitive bidding processes.”
Rosback of Republic Services notes that municipal contracts tied to the consumer price index (CPI) have failed to keep pace with actual costs. “Throughout the recession, municipal and county contracts haven't realized the kinds of annual increases we have had in the past,” he says. “The CPI has been flat.”
That's to be expected. What's unusual is that waste firms are demanding higher prices in contract negotiations, and counties and municipalities are agreeing to pay. “For contracts that haven't been renegotiated and re-priced for five years — a typical term — counties and municipalities are seeing increases of 20 percent to 40 percent from all of the companies bidding on the business, and they're getting sticker shock,” Rosback says.
Since all the bidders are raising prices, local governments have no alternative but to agree to some level of price increase.
Higher Costs, Slower Pay
The price hikes are necessary because waste firms' costs are not shrinking as they normally would during a downturn. Costs are rising, and revenue generated by higher prices is not flowing to the bottom line. Instead, it is paying for the rising operating and capital costs of trucks, labor, landfill construction and health insurance. While oil prices seem to have stabilized for the time being, no one can be sure that they won't soon take off again, raising the cost of plastic containers, landfill liners and other plastic materials as well as fuel.
Capital costs for trucks are rising faster than normal. “We have about 250 trucks on the highway, and we buy 10 to 30 trucks annually to refresh the fleet,” Coulter says. “In a typical year, we'll buy five roll-offs, five front-end loaders and five rear loaders. But we haven't bought any trucks for three years now because of rising engine prices.”
In 2007, U.S. Environmental Protection Agency regulations tightened restrictions on diesel engine emissions. The new regulations required equipping engines with thousands of dollars in new emissions technology in 2007. Another round of emission regulations will raise engine costs again next year. While many companies have delayed refreshing their fleets for a number of years, sooner or later, they will have to loosen the purse strings and pay the higher truck prices.
Taxes and fees are going up as well. According to Rosback, landfill disposal fees levied by many recession-weary state and local governments have risen by $1 to $4 per ton, while franchise fees charged by counties and municipalities have begun to rise. “Administrative costs are up, too,” he continues. “Rising postage costs have made it 20 percent to 30 percent more expensive to bill residential customers.”
While raising prices to pay higher costs doesn't fit the profile of a recession, slower paying customers do fit. “It's taking longer for payments to come in,” says Pat Kelly, vice president and general manager with Ches-Mont Disposal LLC in Skippack, Pa.
Peoria Disposal has seen the time it takes receivables to come in move from about 25 days to 65 days this year.
The trick to dealing with such a strange recession, one in which prices and costs continue to go up as they do in a healthy economy, is taking care of residential customers. “We've done a good job of offering value for the price we charge residential customers,” Rosback says. “We don't just pick up the trash. We offer recycling, bulk pick-ups, green waste collections and other services that people need and want. That helps to offset the impact of rising prices.”
How long is this strange, ugly recession going to last? During August of this year, the economic news seemed to improve. Has any good news filtered into the waste industry? “I can't tell,” Coulter chuckles. “One week, things seem to improve; but the next week, things get worse again. I am sensing that the roll-off business seems to be picking up a little. And while our C&D business has been zero for six months, I'm starting to see some bids. Is it a trend? I don't know.”
The waste industry is crossing its fingers.
Michael Fickes is a Westminster, Md.-based contributing writer.
- Read the "Surging Bond Costs" sidebar for more information on how bonding costs have risen dramatically.
Surging Bonding Costs
In a little noted cost area, bonding costs have risen dramatically for waste companies, which often own their landfills. Local government regulations require waste companies to bond landfills to ensure that funds will be available to pay for environmental damage that the facility may cause.
Bonding companies rely on the credit markets to perform on the bonds they have written. The collapse of the credit markets that heralded the recession drove many bonding firms out of the waste industry. "There are many fewer bonding companies in the market today compared to a few years ago," says Mary O'Brien, chief marketing officer for Jacksonville, Fla.-based Advanced Disposal.
Making matters worse, continues O'Brien, the companies that remain have grown more selective about the industries they are willing to service. Add to that the fact that cities and counties are demanding the higher, more secure bond ratings, and some waste companies are losing their ability to bond their landfills. "Local governments used to accept B-rated bonds," O'Brien says. "Today they want A- or A."
Many smaller waste companies cannot meet the more strict underwriting standards that accompany higher bond ratings. Even if those firms have healthy residential businesses, they are in danger of losing disposal income produced by tipping residential waste at their own landfills.