The mood at WasteExpo 2015 was quite upbeat, particularly as most participants cited a pickup in business during the past month to six weeks, after another tough winter in many parts of the country. Given the apparent, widespread volume increase, the floor was remarkably free of the usual finger pointing over price discipline (or the lack thereof), as an oft-cited shortage of “cans” (primarily roll-off boxes) was prompting price increases across the board. A shortage of containers has not been a factor in the industry since the Great Recession! The floor was busy, with attendance and number of companies represented at record levels.
Investor Summit, Heavy Hitters themes
Garbage is good. All the Investor Summit presenters (encompassing executives from all the publicly-traded companies) cited a broad-based recovery in volumes with better price retention as a result, which seemed to generally span all lines of business and regional geographies, though construction and demolition (C&D) and industrial still remained stronger than the commercial volume recovery. Residential construction was cited as key to a continued volume recovery.
The Investor Summit also contained a private company panel, with four private haulers from around the country. Somewhat surprisingly, the private company representatives were even more positive, often ebullient, about industry conditions than the publicly-traded companies–even in the Northeast, which has been a laggard. The publicly-traded company circumspection was probably due to several factors, including some conservatism, as they are accountable to shareholders.
In addition, though it is a gross generalization, the private companies often have a higher proportion of C&D business–which as just noted was showing the greatest strength by numerous reports. Private companies often have a lower overall percentage of recycling, particularly associated with single-stream recycling and material recovery facilities (MRFs), to be discussed in more detail below. Industry lore also has the private companies filling their “cans” first in a volume recovery, which if true this time around, could be a harbinger of better volumes for the publicly-traded companies in future quarters.
Recycling is broken. Although Waste Management’s CEO, David Steiner, has been the most vocal about the various problems plaguing the recycling business, all the participants agreed that the current, common contract model (typically a commodity-based model) was very flawed in today’s environment and must be reworked and changed. The industry is facing a nasty combination of low recycled commodity prices and high levels of contamination, which is increasing processing and residue disposal costs. That’s particularly true given the growth and popularity of single-stream recycling, which raises recycling volumes dramatically but with a commensurate increase in contamination and post-processing residue. All the participants were consistent that the contract model must move to a fee for service, covering processing costs and some return on investment, given the large capital costs involved in a state-of-the-art MRF.
Beyond that, there was some discussion as to whether there should then be a revenue-sharing arrangement for the commodity value (and risk) with the customer, or whether the solid waste companies should take on any commodity risk at all. Despite its issues, there seemed to be general agreement that single-stream recycling is NOT going away, and that China was going to maintain Green Fence contamination standards; thus, public education on the right way to recycle must also be stepped up or resumed. All players also agreed that all this unfortunately will take time.
Merger and acquisition (M&A) valuations remain a stumbling block. For various reasons, interest in M&A activity remains very high among all the players, and the number of potential transactions out there has been elevated during the past two years. Getting them done, however, is another matter. Seller expectations remain the largest stumbling block, and lofty valuations were cited by all the participants. That said, it is more likely than not that there will be more activity out of, and stemming from, this year’s WasteExpo.
And activist investors have struck the solid waste industry. On the Friday prior to the show, activist investor JCP Investment Management sent an open letter to the Casella Waste board, calling for the annual meeting date to be set and announced, and naming three people it wanted to put forth as potential board members, including industry veteran Brett Frazier. The letter also cited that JCP had had numerous inquiries from strategic players who were interested in acquiring Casella Waste since JCP became more publicly involved in Casella Waste in April of this year.
Industry analysts have pegged Casella’s valuation on a takeover basis within a very wide $5-$10 per share. Casella’s management had little comment on the situation at the Investor Summit, other than to say they would consider the proposed board members as part of the process, while noting that the company on its own had made significant progress during the past two years on a number of fronts.
Tidbits from the recycling education sessions
We attended three recycling education sessions–on paper, plastics and glass–which unsurprisingly were all very well attended given the focus on recycling this year. The sessions all contained a wealth of information on the longer-term trends and current issues in these three recycling areas, which we hope to review in more detail in future Business Insights, along with the whole recycling quandary. However, both the paper and plastics recycling sessions offered glimmers of hope that pricing may have at least stabilized or bottomed, and may have some upside.
In the paper session, noted recycled paper expert Bill Moore, of Moore and Associates, thought recycled paper pricing may have 10-20 percent upside from current levels by year end, while the plastics presenters both thought plastics pricing was bottoming or stabilizing, with the potential for very modest upside this year. On the other hand, it was apparent from the glass recycling session that there is no quick fix or easy answer for the gnarly issues and problems caused by glass, particularly in a single-stream MRF situation.
The coal ash education session
Part of this session encapsulated the new rules for coal ash disposal under Subtitle D. (We wrote about the coal ash opportunity in January) It also detailed a number of engineering/material handling issues that the solid waste industry is likely to face as it inevitably handles more of this potentially enormous new waste stream. At present, however, it is extremely difficult to predict or quantify how large this opportunity is, as well as the time frame, according to the session presenters. That said, we learned at the show that a number of the larger companies have dedicated personnel just to this area!