May 30, 2013
Conversational Impressions from the Show Floor
The mood at WasteExpo 2013 was upbeat and improved from last year. People were enthused to return to New Orleans after so many years away. The floor was busy, with square footage and number of companies generally equal to that of the 2012 Las Vegas show, and it included among other 2013 new initiativesa new Organics and Composting Recycling Pavilion. While not final, attendance appears down slightly from last year’s record turnout but on par with previous shows. Below are thoughts on key industry drivers gleaned from numerous discussions with industry players, both public and private.
That was Then, This is Now
The most notable aspect about the ever-popular topic of pricing was the lack of focus on it this year. Last year, the show was held right after first quarter publicly-traded company conference calls, in which the specter of price cutting in the industry was raised. As a result, the primary topics of conversation last year were whether a price war had broken out in the industry, who was responsible, and the inevitable finger pointing.
This year the comments on and outlook for pricing were much brighter, primarily due to a better volume environment (a little volume goes a long way to alleviate price pressure). Additionally, Waste Management’s more aggressive stance on price and fee increases, highlighted in its first quarter conference call this year, was noted by numerous players with anecdotes of follow through in the field. By most reports, “the memo from corporate was received by the field.”
Although other companies were not cited as frequently as Waste Management for raising prices, there was no widespread commentary on price cutting either, with regard to the industry as a whole, or specific players. Bottom line, the commentary was supportive of an improving price environment during the course of the year.
The upside surprise, and the focus at this year’s show, was the improving volume environment. Fairly consistently, upward volume trends were characterized as feeling sustainable, or “better than just seasonality,” as opposed to the false starts of the last several years. The most frequently cited driver was the return of housing construction, particularly in what were very depressed housing areas like California, but more generally in the South and West.
As a result, construction and demolition (C&D) volumes and landfill tons in particular were coming in above recent expectations for a number of the industry participants that we talked to. Given that, haulers were talking about purchasing roll-off equipment and vehicles for the first time in five years. But, other lines of business were also characterized as seeing stability or improving trends, and thus haulers expressed cautious optimism that the industry had finally turned the corner on overall volumes.
There was certainly some grousing that volumes remain below the absolute levels of 2007 and 2008 and may never return, which frankly would seem to be inevitable given diversion and sustainability programs, which proliferated during the long downturn. That said, the delta appears to have turned positive.
The upshot of all this was greater confidence in the business environment—a number of players noted that at this time last year, they KNEW they weren’t going to make budget (exacerbated by a declining commodity price backdrop), whereas this year, although it’s early, most players believe they are on target. For the publicly traded companies, comfort levels have increased with the rise in the stock prices.
China’s Operation Green Fence and Commodity Prices
As tracked by RISI, recycled paper prices modestly declined in May from April, roughly in line with industry sources’ estimates referenced in last month’s Circular File on Operation Green Fence. Here again, how much of the decline is due to the Green Fence, or an overall sluggish global economy was debated at the show.
In the “Paper Recycling Markets: Boom or Bust?” education session, both speakers (one from RISI, the other from Pratt Recycling) expressed a belief that recycled paper pricing would again improve, at least from current levels, in the second half of the year.
Of note, however, was a comment about the longer term. There was concern expressed that the restrictions imposed by the Green Fence, and the resultant lower exports, might force the Chinese to improve their own domestic recovery rates of waste paper, currently below the U.S. and well below Europe. If that ends up being the case, it might more permanently negatively impact the U.S. recycled paper export market.
M&A Less Front and Center
Last year, with the Veolia solid waste assets on the block and the specter of higher capital gains taxes looming, merger and acquisition (M&A) conversation was front and center. This year, the activity is expected to be more muted, though the usual acquirers, such as Waste Connections and Progressive Waste, saw interest and activity (mostly of the smaller, tuck-in variety) at their booths.
Private equity players remained out in force, underscored by a panel at the new Investor Summit, which emphasized the interest in, and suitability of, the solid waste industry for private equity participation, given its stability and relatively high cash flow generating characteristics.
Likely in response to the higher stock prices of the publicly held companies, sellers’ expectations have risen as well, and one industry player called them “a turn or two too high,” particularly as buyers are now more focused than in the past on the potential capex (capital expenditure) needs and ROIC (return on invested capital) hurdles when looking at a new acquisition.
New This Year…
In addition to the pavilion, WasteExpo debuted a whole education track on composting and organics recycling, which was generally very well attended and will be discussed in future issues. Haulers continue to express concerns and cite difficulties with organics diversion, including economics (given small volumes), scalability of treatment options, composting siting issues and “the yuck factor.” That said, as a rule of thumb, a diversion or sustainability program that calls for a diversion rate in excess of 50 percent probably has to include some type of organics diversion – that’s where the available tons are.
Wunderlich Securities, in conjunction with Penton’s WasteExpo, also debuted the first Investor Summit, where veteran environmental services analyst Michael E. Hoffman hosted a who’s who of the industry’s top management in an informative series of give-and-take interviews and panel discussions on areas of interest such as energy waste and sustainability, which lasted throughout the day Monday, May 20 th .