THE WASTE INDUSTRY'S game of Hungry Hungry Hippo has long been over, but that does not mean waste management companies have put the lid on the game. In fact, during the roundtable discussion Waste Age held at WasteExpo 2004, the CEOs from the industry's top companies shared that they are still willing to buy operations. So although the rampant acquisitions of the '90s are over, Waste Management Inc. alone predicts it will spend $250 million in 2004 for “tuck-in” acquisitions that are “accretive” and can be vertically integrated into the Houston-based company's existing operations.

How will these small gulps — on both the hauler and manufacturer side — affect the industry? And what effect are recently imposed regulations having on waste management companies? Read on in this second installment of our exclusive CEO Roundtable.

The roundtable participants were Mickey Flood of IESI Corp., Ft. Worth, Texas; Jim Perry of Waste Industries, Raleigh, N.C.; Ronald Mittelstaedt of Waste Connections, Folsom, Calif.; Bill Rumpke Sr. of Rumpke Consolidated Companies, Cincinnati; and Mike Sangiacomo of Norcal Waste Systems, San Francisco. The discussion was moderated by Bill Wolpin, Waste Age editorial director, and Patti Tom, Waste Age editor.

CEOs Paul Jenks of Onyx Waste Services, Milwaukee, Wis.; James O'Connor of Republic Services Inc., Ft. Lauderdale, Fla.; and David Steiner of Waste Management Inc., Houston, were unable to participate because of scheduling conflicts. So, their responses were added at a later date.

Editor's note: This is the second article in the three-part CEO Roundtable series. Part 1 of this discussion appeared in Waste Age's August 2004 issue [page 28]. The continuation will be published in Waste Age's October issue.

Waste Age (WA): Where are you in terms of acquisitions?

Mickey: We did a major acquisition in October. We bought the largest landfill in New York State and vertically integrated it into our system. It was a major capital expenditure, so the next quarter, we basically backed off acquisitions. We recharged with a new debt and new equity fund. We're back in acquisition mode. We're focusing more on tuck-in type acquisitions, which are created to our business line already. Like most other companies, we're trying to vertically integrate those acquisitions into our own landfills. We opened up a landfill in St. Louis, which we're very excited about, and we've done a number of acquisitions up there. We're looking to grow that market dynamically. We're working back in the Northeast again, too, with the landfill purchase that we did. I would say that we are focused on acquisitions, but we're very focused on margins as well.

Bill: We are kind of in a hold mode. We're buying small tuck-ins, and we want to consolidate everything and get every customer as you go down the street. But at the same time, we want to reduce debt to practically nothing. At one time we were $150 million in debt; we're down to about $85 million right now, and it's going to be dropping down in the next three years to about $35 million. After that time, we'll put our other hat on and start going forward again.

Ron: Over the last six years, our companies averaged about $85 million to $90 million a year in acquisition revenue. In 2003, we did $65 million, so it was a little bit down relative to the previous five years. We expect this year to look similar to 2003; we're expecting to do somewhere in between the $50 million to $70 million range of acquired revenues for the year. We'll stay at that level going forward. It's not as active as it was in the mid- and late '90s. The reality is there's less of the larger integratable opportunities. In the franchise business of the West Coast — California, Washington, Oregon — economics do not drive those transactions. Lineage transition issues and estate planning drive those transactions. They will happen, and they do happen. Mike and I see them all the time, but it's very difficult to predict when. So I don't see a material change for us.

Mike: We have not done a lot in the past several years — a few small ones. We're always looking for things in the Western states — Oregon, California, Washington. Ron usually pays more that we're willing to, but we're always looking. If there's opportunities, we'll be there.

Paul: We will continue to evaluate all acquisition opportunities. While opportunities to acquire fully integrated assets are few and far between, there are assets that are for sale that provide adequate returns, and they will be the focus of our near-term growth strategy.

Jim O'Connor: Republic Services still is actively buying companies in the solid waste industry. We are highly selective and only make acquisitions that can contribute to the continued growth and strength of the company while ensuring that we meet the expectations of our shareholders.

David: Waste Management is a big cash flow company. During one of the weakest economic cycles in our lifetime, the company still generated between $900 million and $1 billion of free cash annually (including free cash flow, which is a non-GAAP financial measure). In 2004, we will allocate this free cash to our dividend of $0.75 per share per year (or $425 to $430 million a year); to our share repurchase program of $400 million to $500 million a year; and to acquisitions. We're estimating about $250 million in 2004 for “tuck-in” acquisitions that are accretive and integrate into our existing operations. We don't see this strategy changing over the next few years.

Jim Perry: We've gone through a period of looking at all the acquisitions we made. We went public on June 13, 1997. It was Friday — I'll never do that again. We took $100 million in revenues up to $270 million in the last year with half a dozen or so acquisitions. Going forward, we're looking at tuck-ins as our primary focus. We're not focused as much on new markets, and we are very, very conscious of the impact acquisition has. We're a smarter buyer now than we were in the go-go era. All of us have wised-up a bit in paying fair prices. Multiples appear to be coming back. I read a list the other day of the multiples paid in the '90s back in the last roll, and there was some great selling going on.

WA: How are regulations (i.e. for engine emissions, OSHA, bioreactors) affecting your business?

Bill: All of these things have a dollar figure. For bioreactors, we've been wanting to do that forever, and we just can't get the state to agree. We know darned well that if we put leachate back in there instead of sitting around for 100 years, [the landfilled waste] is going to be degraded in 15 years. And there's going to be gas coming off of it, which [can be used to] heat homes. We're pleading for stuff like that, and the state is slow to move. The regulations will cause prices to go up as always.

Ron: As new regulations come in, we have to comply. The West Coast has always been on the leading edge, for better or worse, in the regulatory environment from an environmental compliance standpoint. We obviously comply and have to factor that into our cost structure. It ultimately gets paid by the consumer, whether we provide the service or one of the other companies sitting here does. The legislature has to decide who ultimately pays for these things, and it's the people that elect them. But we don't see any of these having material changes to the business. These are all fairly nominal tweaks that have been going on for decades. There's just a perpetuation of that. In our industry, we'll adjust and react, and implement everything.

Mike: I couldn't agree more with what Ron just said. California seems to be the home to a lot of new regulations. Community after community seems to want alternative fuel engines. If they are willing to pay for them, they can have them. We're not going to just give them things. The airport in Los Angeles has mandated that you cannot add diesel trucks to your fleets. You have to go to alternative fuels. The Supreme Court, for now, has said, “maybe that's a bit over reaching,” but it's going to happen. But we deal with it. It's just a fact of life, and customers pay.

Jim Perry: Having the association in front anticipating and factoring in what regulations are going to do for your business is very important. We do a better job now than we used to do. Before, things would pop up, and we reacted with knee-jerks. Today, we anticipate — we'll see what's going on on the West Coast and hope it comes easy. The thing that I want to highlight for our company is this is where the decentralized, entrepreneurial spirit within a company takes hold. Because when you anticipate those things, you can't look at all of them. I can't look at all of them and see how they are going to impact various facets of our business. So our group does a great job of that, whether it's a bioreactor and somebody's got their hand on that pulse seeing what it's going to do, or the new engines. I don't direct that. It just sort of happens because people are empowered, and they have an ownership stake in the company. They want to be proactive as opposed to reactive — and that's a good thing. So being more proactive is the point.

Mickey: When you look back in the late '80s, early '90s, and the Resource Conservation and Recovery Act/Subtitle D was going to be enacted, there was a loud clamor that we couldn't afford this and wouldn't be able to provide safe disposal. Landfills will be closing; there won't be capacity; there will be garbage in the streets, etc. There was an overreaction. We see now that although 17,000 landfills have been closed, the capacity of airspace is greater today than it was 15 years ago. The entrepreneurial spirit, the creativity of this industry, has always responded well. We are all ethical providers. As long as we all live by the same rules and those rules are better for society in general, then the only thing I would want for sure is that they are fairly and equally applied or enforced.

Paul: Your question involves several areas. Regulations on engine emissions have driven up the costs of equipment, which are part of the increased costs described earlier. Bioreactors, while more expensive to build, have a significant payback, and we encourage the development of bioreactors at all of our sites. Other recent regulations have had an impact on our operating costs, albeit a small one.

Jim O'Connor: These regulations, like all regulations, cost money. That being said, the regulations that we see are well intentioned and do result in a cleaner environment and a safer workplace. As a company, we support these efforts to enhance worker safety and preserve the environment. At the same time, we need to educate the customer so that he or she understands that there is a cost associated with regulation. In my mind, a cleaner environment is worth the investment.

David: Our approach to regulation has been to work with the federal agencies in a cooperative manner to ensure that regulation of our facilities is reasonable and based on sound science and engineering. Indeed, we are currently engaged in cooperative action with the government to implement bioreactor landfill technology at many of our landfills.

As you have noted, mobile emission source reduction also is an issue that is affecting many states. Many of the communities we serve in California are in nonattainment areas, and they need large reductions from mobile sources to achieve clean air standards. We have worked hard to be a leader in emission reduction efforts. Waste Management has the nation's largest fleet of natural gas refuse trucks, and we are starting to participate in a major retrofit program in California to reduce particulate emissions from our diesel trucks. In addition, we are proactively testing a wide range of new low-emission, energy-efficient vehicles and emission reduction technologies.

WA: How have acquisitions among equipment manufacturers affected your cost, service and delivery?

Ron: Most of what we've seen has been on the truck side, the consolidation of the Leaches, the Wittkes and those kind of companies by some of the larger body and chassis manufacturers in the country. From our standpoint, it really hasn't changed a whole lot. We still deal with most of the same people we did before. There is probably less selection, but it really has not impacted the business in any material way. We're very decentralized, and we allow our local market managers and area mangers to make the decisions on capital allocations to the vendors they see as best-suited for those local markets. If the manufacturers do not respond, the business gets taken elsewhere. It's mostly been net-neutral for our industry.

Mike: I'd say the same thing. There's been a little bit of improvement in some companies, and little bit of worsening in others. Overall, it's nothing noticeably different. Equipment still seems to last as long as it did before. We always make sure we take good care of it so it does last a long time. We haven't noticed any consequences.

Jim Perry: Because we put a higher value on the service we deliver, I try to turn that around on manufacturers and vendors that support our company. Those who provide great service, not only cheap price but great service, we reward. But we don't have all our eggs in one basket; we let our management pick and select equipment. I don't think on a net basis it has had a significant change. We recognize and reward service, and we stick with service providers. We will leave manufacturers that don't provide good service.

Mickey: IESI has a national purchasing plan that we take advantage of as far as pricing, which I think all of us do. The industry has become wiser purchasers because, over the years, [the industry has] specified the type of compaction and or productivity that we need out of the equipment. Maybe that was through trial and error over time, but manufacturers have responded and done a good job. Years back, if you put 4.5 tons on a truck, that was a lot. Today, you're going to put three times that amount. When you look in terms as to where the industry has traveled, manufacturers are supplying a quality product. On the purchasing side of it, users have become wiser and more prudent in their purchasing, and more demanding on their warranties.

Bill: As long as there are two people bidding out there, that's all we ask for. We'll get our numbers because if they're good business people, they're salivating over 1 to 200 trucks per year. But trucks are getting better, and we're taking advantage of the warranties. Maybe 15 years ago, we'd have warranties up to $1 million and hardly get anything back. Now we're getting every penny back. So we're watching them, and they know they have to come to the table with better services to maintain the Rumpke business. This consolidation means nothing more to us, but I think it has helped service.

Paul: We have seen very little impact by the consolidations in this area.

Jim O'Connor: The vendor consolidation has been positive. Great teams have come together to produce equipment that is built better and allows us to be more productive. Additionally, from an environmental perspective, our trucks are much cleaner in terms of emissions.

David: Again, our procurement program is focused on working with fewer, strategic suppliers for our larger expense items such as trucks, truck parts, containers and landfill related items. So, we haven't been adversely affected by acquisitions or consolidations.

WA: How important is equipment standardization?

Mike: In larger communities, we try to make sure we have very standard equipment so we don't have to maintain more parts than needed, so that we can keep the minimum number of spares around , run the business competitively and keep costs down. To the largest extent possible, we make sure that everything is as same as possible so we don't have to keep investing in capital that we don't otherwise need to.

Jim Perry: I echo that. Once your people who service equipment get to know the systems on the equipment you're buying, changing and going to another manufacturer just doesn't help. So we try to standardize as much as practical. It is a decentralized decision. At the local level where you can get that other service, it is very important that those managers buy equipment that the distributor can service and maintain.

Mickey: Your inventory is assets not being utilized, so we try to leverage our standardization. We try to minimize the various types of parts. We're very loyal to our vendors, but we demand the vendors be as well to us — as far as accountability through the warranty process. Even if it isn't [part of] the warranty process but there's something wrong, we'd expect them to step up to the plate.

Bill: We used to have inventory at each outlet. We had something like 22 different outlets with a half million to $1 million worth of inventories. Now, it's put on all the truck companies — they get to carry that inventory. We have such a rapport with [the manufacturers] that if we have something down at Christmas, they'll come in and open up the shop for us to get our parts. We do centralized buying — we buy all the same brand truck, all the same fuel pumps, all the same radiators and everything else out there. So for someone to knock that purveyor out of the market, he's got to show us why, because we're really heavily invested in that particular truck type. All of our shelves are filled with his parts. So the guy who wants to take him out of the market has got to beat his price. The champion doesn't lose, he has to get beaten.

Ron: We have tried to standardize fleets by market, by type of business. If we want to have a standard residential fleet, standard commercial fleet, standard roll-off fleet, it's by market. We've worked toward that, and that's been a difficult thing to do when you do a lot of acquisitions. But that is the objective. We also take advantage of national pricing programs. We allow our people to make parts and inventory decisions on a local basis, but they have to take advantage of the national pricing or they have to justify why they're not using the preferred vendor we have for tires, fuel, radiators, batteries, etc. It's a market-by-market issue that we've tried to standardize.

Paul: Fleet standardization on a company-wide basis is good but not critical. It allows us more purchasing power if we limit our purchasing to one or two suppliers. However, at the site level, having a standardized fleet is much more important because of parts availability and training on repairs and maintenance.

David: We are focused on making our fleet more efficient and cost effective through preventative maintenance programs and routing software. We believe this is where we can drive the most value for the company.

WA: What are the critical issues with your employees?

Jim Perry: There's a higher appreciation for jobs. In the past, our turnover rate was higher. I'm going to fault the economy, but people are more cognizant of a good job. In our company, keeping a hand on that pulse is important. We have second-generation fathers and sons following in each other's footsteps, and that's important. We've spent a lot more attention on safety. When the insurance market is very tough, you pay a price for not having your safety or risk management program in order. We spent a great deal of time focusing on that, so our people recognize that, and we're holding them more accountable for their job practices and rewarding them with a little better pay, better benefits and working conditions (trucks, equipment). It's a partnership. We're trying to do our part while, on the other hand, expecting a more productive, safety-conscious employee. It's working well for us.

Mickey: Our employees are one of our three constituent groups that we respond to. Without good quality people at the collection level, you will have problems relative to productivity; you'll have problems relative to service. We try to have a minimal amount of turnover. We are very competitive with benefits packages. We provide an incentive plan at all of our companies for collection people. On the management level, I subscribe to the philosophy that there's nothing more expensive than cheap help. We will seek out and try to hire the best people in the industry, because they have tremendous experience; they've been there before; they've done it; they understand the business; and it's an industry in which it's good to have a lot of hands-on training because that's what it takes to be successful.

Bill: Every morning at 4:30, our employees start going over their truck, and rules must be completely followed. There are incentives for guys who follow all the Rumpke rules. We also have incentives in which employees can rise up through the company. Usually, a rear loader job is a young man's job. We're getting more automated all the time, but there are fewer people who are willing to do those manual jobs. They'd rather sit behind the computer or do something else. So we have incentives so employees can rise up through the ranks as a driver, from rear loader, to roll-off, to front loader to salesman, and all different kinds of things along this line. People are your No. 1 asset. You've got to take care of them.

Ron: As a panel, there's a couple of themes we've hit on today: One is the need for pricing improvement. The other one I'd like to spend a minute on — because it's affecting all of us right now — is the rising cost of medical insurance. In 1999, it cost us $4,100 a year to provide full benefits for a family in our company. Last month, with the renewal of our plan, it's now $10,600 a year per family, which is $855 per month we're paying per family. We have about 2,700 families on our plan right now. I bring this up in this context because one of the things we're trying to do is put a major push on educating employees about hidden compensations that have been absorbed over the years. For the most part, in many industries in the country, benefits are looked at as an entitlement to a job and not really an insurance product. We're pushing a big educational promotion right now to show employees the cost of that benefit and what that means in the total compensation. Our industry overall provides a very high-level benefit, relative to the alternative type opportunities that many of our employees would otherwise see in manufacturing, construction, industrial-type jobs. Obviously, the safety program is a big issue, and continual training is a big issue that all of our companies tackle on a local market basis.

Mike: Our company is employee-owned, so all of our employees participate in an employee-stock ownership plan and benefit directly by that. As a result, we try to educate them constantly about the impacts of their actions on the value of our business. We're educating them on health care costs, trying to make them wise users of those services. We encourage them to only use them when they need them and use them wisely, but also to be healthy in the way they live. We just do a tremendous amount of that kind of thing. In California, many of the things we have to provide are regulated. For the most part, just getting people to know what the issues are, understanding them, treating truck drivers just like you would the management side, letting them know what those impacts are [helps with employee issues]. As a result, we don't have a lot of turnover. The bulk of the people we're going to lose leave within the first couple years of employment. Beyond that, they're looking toward retirement. We get [employees] involved in the kind of issues that impact them and the value of their business.

Paul: Employees today want to be more involved in the discussions that impact their lives and that of their families. Better communications with employees is critical. They want and deserve input. On a more immediate basis, access to cost-effective health care and the rapidly rising cost of health care are of major concern to our people.

Jim O'Connor: We view our employees as business partners. By asking for their input and listening to their ideas, we have made many changes and improvements in both efficiency and safety. Over the past 12 months, we have conducted employee opinion surveys to get the pulse on how employees feel about their work environment. The results of these surveys allow us to focus on areas where we can improve relations with our people. The results also will help us determine critical training needs among our team.

Our most important employee issue continues to be safety. We can't create a great place to work if it's not a safe place to work. At the end of the day, I want to be certain that we take care of our people and send them safely home to their families.

David: Clearly, one of our biggest challenges will be in developing and retaining the incredible talent we currently have. As the economy improves, other industries will be trying to recruit from our talent pool. We want our employees to stay with us and to pursue advancement opportunities within Waste Management. We have a tremendous workforce here, and we want to continue to improve our training, development and recruiting programs to ensure that we are a preferred place to work.

Editor's note: The continuation of this exclusive CEO Roundtable will be published in Waste Age's October issue.