Riding Out the Recession

Riding Out the Recession

The deepening recession spawns a host of strategies

Officials at Fort Lauderdale, Fla.-based Republic Services took notice when residential construction started to decline. "Maybe a year or so ago, about 15 percent of our revenue came from temporary roll-off activity — that is the disposal associated with residential and commercial construction," says Tod Holmes, chief financial officer (CFO) with Republic. "Today, it's about 10 percent, down about one-third."

Phil Wehrman, CFO with Cincinnati-based Rumpke Consolidated Cos., saw much the same thing happening in the nation's mid-section. "Disposal related to homebuilding has been flat for about two years," he says.

It's a similar situation for Waste Pro USA, another regional waste management firm based in Longwood, Fla. "We've seen the effects of recession mainly in our construction and demolition (C&D) hauling and landfill business," says Bob Hyres, executive vice president for Waste Pro. "Our C&D revenues are off by 27 percent. Fortunately for us, C&D is only about 5 percent of our business."

The decline in construction is but one symptom of the deep economic woes now plaguing the country. In December, the National Bureau of Economic Research announced what had been readily apparent for months: the U.S. economy is mired in a recession.

"This could be more painful than other recessions we've seen," Holmes says. "In 2001, for example, the problems were isolated in the dot-com area. Once that bubble worked itself out, business came back. But today, we have the housing crash, the financial industry meltdown and consumer credit problems."

For months, waste firms have been preparing for what indeed may prove to be a severe recession. None of the firms interviewed by Waste Age are considering extreme measures such as hiring freezes or layoffs yet, but they have put a variety of coping strategies in place. Such strategies include being realistic about what is happening today, adjusting capital spending, taking advantage of available tax benefits, managing prices paid for recycling commodities, and reviewing and tweaking business models.

Get Real

Waste companies grow when the population grows and new households spring up, which are followed by retail, restaurants, gas stations, office buildings and other commercial infrastructure. With residential construction on a downturn, that kind of growth has stopped for the time being.

Of course, existing residential business is fairly recession proof. Households still make trash every day, and it has to be collected. While households aren't providing growth, residential trash collection business probably won't go into decline.

But commercial business can. "We've seen our commercial business go from about one-half percent positive [growth] in the second quarter of the year to one-half percent negative [growth] in the third quarter," Holmes says.

In other words, the economy is running commercial customers out of business. Holmes points in particular to the retail industry, noting that the 700-store Circuit City chain has announced the closing of 155 stores, which will translate into fewer commercial pickups.

The International Council of Shopping Centers, New York, predicts that by the end of December, approximately 6,500 retail stores and commercial collection pickups will have been shut down. At the same time, the Better Business Bureau says that business bankruptcies have risen 41.6 percent this year, shutting down thousands more commercial trash pickups.

Unfortunately, no one is predicting a quick turnaround. Therefore, waste firms have to be prepared to deal with a long-lasting recession.

Adjusting Capital Spending

Waste companies generally spend about 10 percent of revenues on capital assets like trucks, containers, excavating equipment and landfill cell construction, Holmes says. When a declining economy begins to cut revenues, adjustments to capital spending can maintain profits.

One of the first markets where Republic noticed a business slowdown was in Jacksonville, Fla. When the region's housing boom soured in 2007, Republic found itself with extra trucks and roll-off containers in the market. When construction began to slow in that area, Republic quickly packed up the extra equipment and sent it to Texas, where the energy industry has at least so far maintained a healthy regional economy, creating a need for capital equipment.

"One of the things we can do when a local economy slows is scale our collection activities by moving assets into busier marketplaces," Holmes says. "So we'll add to or shrink fleets depending on regional demand."

Regional haulers like Rumpke and Waste Pro have fewer places to move equipment. But, "we are holding on to equipment a little longer," Wehrman says. "We're replacing things as necessary instead of [adhering to] a seven- to eight-year replacement schedule."

Rumpke also focuses on driver training to ensure that drivers don't wear trucks out early by failing to report maintenance needs. Even then, Wehrman says, when trucks get to be 12 years old, it probably isn't worth repairing them.

Founded in 2001, Waste Pro's trucks are only seven years old, and the company hasn't needed to refresh its fleet yet.

Tax Benefits

As companies across the country prune capital spending, the federal government wants companies to spend more on goods to stimulate economic activity. To that end, Congress enacted the Economic Stimulus Act of 2008 (ESA). Among ESA's provisions is an allowance for bonus depreciation on expenditures for certain capital goods like trucks.

Under the bonus depreciation provision, haulers may depreciate 50 percent of the cost of acquiring trucks in the tax year when the trucks were purchased. The remaining 50 percent is depreciated over the normal schedule. Firms should check with an accountant to make sure that their trucks and other capital equipment do indeed qualify for bonus depreciation.

Republic intends to take advantage of bonus depreciation with a truck acquisition in 2008, Holmes says. "[In 2009], we'll purchase more trucks because we want to avoid the step up in cost" for 2010 model trucks that will feature more stringent emission controls, he says.

Managing Commodity Prices

Another victim of the global economic woes are the prices that mills are paying for recyclables. However, some haulers have been able to cushion the blow for some materials. "We've locked in a couple of hedges on fiber prices for the cardboard and newspaper that we collect in our recycling operation," Wehrman says. "We have three-year contracts locked in [from] when prices were at all-time highs."

Rumpke's hedge on fiber contracts proved its value this year when China quit buying fiber, and prices plunged by 60 percent from approximately $140 per ton to $60 per ton.

Of course, hedges don't always work. Haulers that hedged their fuel prices by locking in contracts have been paying a little extra since diesel prices have gone down — albeit not nearly as much as previous gas prices.

"We don't lock in a majority of our volumes for fuel or recycling," Wehrman says. "We don't want to be tied down too much by contracts. Generally we prefer riding the market."

Business Model

Although the waste business generally tends to be recession resistant, some business models offer more resistance than others. As noted earlier, Waste Pro's C&D business is down, like everyone else's. On the other hand, Waste Pro primarily focuses on municipal contracts. "In addition to our small C&D business, we have a little bit of open market commercial work," Hyres says. "But more than 70 percent of our business comes from long-term municipal contracts. Our municipal contract work is on budget in both the front loader and the permanent roll-off segments, and we're ahead of our 2008 budgets in the residential and recycling segments."

Other companies are monitoring key components of their business models, such as receivables and prices to make sure they are behaving properly. Rumpke has beefed up its route auditing routine, both by optimizing routes more often and sending auditors out with drivers to make sure that all the customers being serviced were properly entered into Rumpke's billing system.

"The idea is to make sure that everything is as it should be at all of our collection sites," Wehrman says. "Sometimes, for example, we've found residential customers putting trash into a neighbors container, and we're just collecting and billing one family."

Republic is carefully monitoring the time it takes customers to pay their bills. Typically, bad debts account for about one-fifth of a percent of revenue, Holmes says. During a slow economy, that percentage of bad debts rises to about seven-tenths of a percent of revenue.

"We manage that by keeping the number of days that receivables are outstanding down around 35 days," Holmes says. "In 2001, it took customers an average of 44 days to pay their bills. We've focused on working it down, and 35 days is one of the best averages in the industry."

Virtually no one is talking about lowering prices. "We were glad when industry leaders started raising prices," Hyres says. "We needed that, and prices today are appropriate to the business, and we're not inclined to go back. Certainly the cost of doing business isn't going down."

In the end, Holmes says, being conservative before a recession is the best strategy for an economic downturn. "We follow that strategy," he says. "When times are good, we make sure that we don't get fat and make foolish decisions."

In fact, Republic has often been criticized during good times for its conservative balance sheet. But no one is criticizing the company these days.

Michael Fickes is a Westminster, Md.-based contributing writer.

TAGS: Commercial