Hauler Confidential, Q3 2013Hauler Confidential, Q3 2013
• This survey, in combination with its two predecessors, indicates a more favorable pricing environment for small containers and suggests that the solid waste market is nearing a pivot point on service interval changes.• Several trends support pushing commercial pricing and pushing it at higher rates of change.• Survey data suggests that excess roll-off trucks and containers have been pulled back into service and that demand remains strong.
October 14, 2013
Michael E. Hoffman, Wunderlich Securities
The 1H13 public company reported data and the Waste360/Wunderlich solid waste surveys clearly support the observation that solid waste industry fundamentals continue to steadily improve. Recall that the first survey (available in the April issue or on waste360.com) captured a wide baseline of information across all aspects of the industry. In the second survey (available in the June issue and on waste360.com) we pursued a trend revealed in the first that industry automation (specifically in residential collection) was an opportunity for improving productivity/profitability and ultimately competitive advantage.
Data from the second quarter earnings reporting cycle prompted us to focus the third survey on price and volume trends related to fundamentals in the commercial collection and roll-off segments. Recall that C&D volumes were reported as much stronger in 2Q13 than expected and small container weights had turned consistently positive but had not yet resulted in service interval upgrades.
In the first survey nearly 35 percent of commercial market respondents added customers from newly opened business and 63 percent did so at market rates while 23 percent offered below market rates to win.
Figure 1. Q1 Assessment of the Competitive Environment in the Commercial Market
Business taken from competitor:
40% offered a lower price than what customer previously paid with competitor
Newly opened business:
63% paid the existing business rates, while 10% paid more and 23% paid less
In the third survey the trend shifts upward with 50 percent of respondents’ adding new customers and 53 percent did so at market rates with 27 percent lowering price below market rates to add the new service.
Figure 2. Compared to the Average Existing Commercial/FEL Price Per Yard, Was the New Business Price
Poaching – in which a competitor comes into another commercial route and takes a customer, usually based on lower price –has been a concern. The number of respondents that are doing that has fallen below 50 percent and 27 percent managed it without cutting price! When price was used the change was aggressive, nearing 10 percent.
Figure 3. Did You Win The New Business Based On Offering A Lower Price Than What They Were Previously Paying With Your Competitor?
Given the focus on price by the public companies it would be a reasonable conclusion that price is rising widely. That is not the case. Only 29 percent of respondents raised collection price in the past six months. On the other hand nearly 50 percent of respondents have increased at least the frequency of service on better container volume.
Figure 4. Have You Initiated A Price Increase To Your Commercial Collection Customers In The Past 6 Months?
Roll-off activity was very strong among the public companies in 2Q13; frankly the level of activity caught everyone off guard. The survey results supported that the trend was broad-based and that it continued into 3Q13. About 75 percent of respondents that service roll-offs experienced increased activity in the past six months and that activity was split nearly evenly between residential and commercial work.
Figure 5. Have You Seen An Increase In The Number Of Roll-off Pulls In The Past Six Months?
Only a third of the respondents did not have to either add a truck, container or driver to service the increased roll-off demand. Two-thirds of respondents had no change in price/pull, while 30 percent increased price in the past three months.
The biggest opportunity in the market seems to be landfill pricing. Among third-party disposal users, 60 percent had a price increase in 2013 but 60 percent of that group saw less than a 3-percent price increase. For nearly 70 percent of the respondents the increase in tip fee raised collection costs less than 2.5 percent.
Figure 6. As A Third Party User Of Disposal Have You Had A Tip Fee Increase In 2013?
Even more surprising was that two-thirds of respondents do not impose a fuel surcharge and less than half the group that does cover the cost of the fuel increase with a surcharge, but nearly 60 percent say they do not roll back the fuel surcharge if fuel prices decline.
Survey Method and Approach
The third survey drilled down into the commercial collection (small container) market and the roll-off market. The objective was to understand the price and volume trends and what was really happening on the street and to find out what was influencing price.
The objective of the first survey was to establish a baseline of data about the current state of the solid waste industry. While there were several observations, the overriding conclusion was that price leverage was back and it was still the early days of a gradual, but improving trend in price discipline.
The second survey narrowed the discussion to analyze if automation was an untapped opportunity and the results confirmed that it is and that a competitive advantage can be gained if an operator focuses on automation specifically in and around residential collection.
Like the first survey the third survey was conducted by sending an email invitation to participate on August 20, 2013 and was left open through September 10, 2013. The invitation was sent to Waste360 subscribers and WasteExpo attendees and exhibitors.
Third Survey Highlights
Like the second survey we opened the third to public agencies, private companies and publicly traded companies. We had a larger percentage with 10 years of experience or more than participated in the second survey (73 percent versus 63 percent).
Figure 7. Which Of The Following Best Describes Your Company?
Public or subsidiary of a public company
The mix of drivers is more evenly spread out as well versus the second survey, which was heavily weighted to very small operators.
Figure 8. In Total, How Many Full-time Employees Do You Have Either Who Drive The Trucks Or Ride Along To Assist?
1 to 5
6 to 10
11 to 25
26 to 50
51 to 500
More than 500
Commercial Market Overview
For the past two years there has been a gradual improvement in small container market fundamentals. Whether measured as service interval changes or container weight trends, there was a clear bottom at the mid-year 2011. The first and third surveys support this perspective and the third gives credence to a more favorable pricing environment and suggests that the solid waste market is nearing a pivot point on service interval changes. The later produces enormous operating leverage.
There are several data points related to commercial collection price that suggest more price, not less, is possible. Whether it is new business wins, that only 27 percent of respondents felt compelled to lower price to capture business, or that less than 50 percent of respondents are still poaching existing business, the trends support pushing price and frankly pushing it at higher rates of change.
Figure 9. Compared To The Average Existing Commercial/fel Price Per Yard, Was The New Business Price
Even more importantly, only 73 percent of poached customers were gained by lowering price.
Figure 10. Taking Business Based On Lower Price Than The Competitor?
Finally, more than half the respondents do not cover the cost of fuel increases with a surcharge and nearly 60 percent never roll back fuel price surcharges when fuel prices fall.
Figure 11. Does Your Fuel Surcharge Cover The Increase In The Cost Of Fuel?
Yes (virtually 100%)
No (only partially covers the cost)
The largest concentration of landfills (number of and total volume captured) is with the publicly traded companies. It is our belief that landfill pricing has not kept pace with landfill inflation for the past five years and even more significant that landfill operators are not using tip fees to effect price behavior on the street.
The survey results support this conclusion, with tip fees rising for 61 percent of respondents that use third party disposal. However for 71 percent of the respondents the tip fee increase was less than 3 percent.
At that level of price increase it barely covers inflation at the landfill and puts virtually no pressure on the third-party collection company to raise price at the street. Recall that disposal accounts for as much as 40 percent of the cost of collection.
Figure 12. How Much Did The Tip Fee Increase In Dollars Per Ton?
Less than 2%
2% to less than 2.5%
2.5% to less than 3%
3% or higher
Roll-off Market Overview
The public companies reported robust construction and demolition (C&D) activity in 2Q13, certainly much stronger than the market (and frankly the companies) expected. The survey results suggest that robust trend continued into 3Q13.
Figure 13. Have You Seen An Increase In The Number Of Roll-off Pulls In The Past Six Months?
Nearly 75 percent of respondents that offer roll-off have seen an increase in activity and more than 50 percent had to spend capital on adding containers to respond to this demand. At least 40 percent added either more trucks or drivers as well.
Figure 14. To Support The Increase In Roll-off Collection, Have You Added Any Of The Following?
None of the Above
About 31 percent of respondents have experienced an increase in price per pull and only 2 percent had a price per pull decrease. All of which suggests that excess roll-off trucks and containers have been pulled back into service and that demand remains strong. This should bode well for roll-off container, tarp and truck equipment markers.
Figure 15. How Has The Price Per Pull Changed In The Past Three Months?
Remained the Same
Unsure/Do Not Know
Roll-off activity is a leading indicator of new business formation. Housing starts (ideally subdivisions) and to a lesser degree commercial construction all need to ramp up before a significant upturn in commercial collection service intervals can gain traction. That 75 percent of respondents did not waive fees/surcharges to deploy roll-off containers is added evidence that demand is widening.
Figure 16. Did Surcharges And Fees For Temporary Roll-off Get Waived To Put Containers In Service?
There are several clear conclusions from our third 2013 survey. The collection market is receptive to price increases and those price increases could be larger than are being pushed. For example, landfill prices are not influencing pricing decisions as much as landfill operators may think.
More importantly, roll-backs and waiving of fees is not necessary to put equipment in service. Any company not covering fuel cost with a fuel surcharge should contemplate rolling the current surcharge into the base price.
Clearly the public companies (which also control about 70 percent of the landfills in the United States) need to be more aggressive about raising landfill prices. Private companies in the commercial market not only are not raising collection prices but are eating the landfill price increases that are occurring.
In 2Q13 the public companies posted surprisingly strong roll-off volumes that have been confirmed by this survey, suggesting the trend has held into 3Q given the late August survey timing. Also of interest is the start of positive commercial customer service interval changes. As that service interval pattern comes to the public companies there is tremendous operating leverage that creates another opportunity to raise price.
Michael E. Hoffman is the managing director for Wunderlich Securities, Inc.