THE ROAD TO SUCCESS in the waste industry often seems as if it is littered with obstacles. Immense competition exists among haulers — and among the private and public sectors. Managing customer expectations makes operating in this highly regulated service industry challenging. And the dismal economy in recent years has escalated the difficulty of operating a waste company.
Yet solid waste managers know all too well that the trash will keep coming. So like the pickup services they provide, they deal with the garbage and then focus on finding solutions.
To evaluate how operators are building a better tomorrow, Waste Age invited the CEOs from the top waste management companies to take part in a roundtable discussion on May 18 at WasteExpo 2004 in Dallas. The 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 roundtable 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. The trio still wanted to participate in the candid discussion, so their responses were added at a later date.
Given the participants' divergent coverage areas, it would have been no surprise to discover that their views differed. Yet the roundtable yielded the opposite. Although waste must be managed locally in community by community, the panelists were in agreement on issues facing the industry. They expressed deep concern over such issues as rising medical and insurance costs, as well as attracting a new breed of leadership to the industry. “Yours truly [has been in the industry for] 33 years,” Perry said, “and I don't think I'll be here another 33.”
Regardless, the panelists expressed confidence that the entrepreneurial spirit of the industry will prevail. “There are a lot of easier ways to make a living, but [the waste industry] is managed by unique individuals,” Flood said. Indeed, it became obvious during the discussion that leaders of today's waste industry have heart, soul, brains and hope about the future. And almost more so than growing their businesses — they get excited about growing the industry.
WA: The industry has faced a tough economy. How have your waste and revenue streams changed?
Bill Rumpke Sr.: For Rumpke, it has changed due to the fact that we sold about $33 million worth of assets in the last year, which lowered our waste stream, our revenues — but it is appreciating. Probably 40 percent of what we sold off grew back, but the competition is very tight out there right now, and you can't get a lot of bang for your buck yet. Work on efficiencies and tuck-ins and things along this line. You have to get stronger from within. It works, but not like back in the '70s and '60s.
Ron Mittelstaedt: For Waste Connections, we reported about $565 million in revenue. This year, we'll report somewhere close to $650 million to $700 million in revenue. So in 2003, we were up about 20 percent. We expect to be up close to 20 percent in 2004. The mix of that revenue stayed pretty consistent. About two-thirds of our business is the collection of waste, and about one-third is the disposal and transfer of waste. That's pretty consistent for many of the companies here today. One thing that's different is about 40 to 45 percent of our business is residential. About 50 percent is commercial, and just under 10 percent is industrial. So relative to most of the large players in the industry, we have much higher residential and much lower industrial because we are in a more rural environment.
Michael Sangiacomo: Norcal is primarily a franchise company operated in California. Our customers are a little over half residential, the rest primarily commercial. We've seen pushes in California for a lot more recycling services. We've seen revenue growth primarily in that end with new and expanded programs in places like San Francisco, San Jose and other areas like that. Not being public, we aren't pushing for the revenue growth just for growth purposes. Our revenues in the last year went up 5 or 6 percent. It will be at $400 million this year.
Jim Perry: We just went through three years of rationalizing — that's a popular word these days — and it was a healthy thing. Our revenues grew about 7 percent last year coming off about a 1 percent growth, and that may have been alarming to some people. We're a little bit more optimistic about the coming year, maybe 10 percent growth. Revenues are budgeted at $300 million. Our residential has really grown in the last four to five years, and that's probably where a substantial amount of growth is going to come [from] as people migrate toward the Southeast. So we'll focus on that business segment as well.
Mickey Flood: IESI had a 33 percent increase in revenue from first quarter '03 to first quarter '04. Four and a half percent of that was price, 3 percent was real growth, the rest of it was a roll-forward effect of acquisitions. We have about 300 franchises in the South, mostly in secondary markets. Then there's New York City and the Northeast, and that is not a secondary market. We have become more of a transfer station/disposal company in the Northeast, and our core business is about 33 percent on the landfill and transfer station side, the rest of it in collection.
Paul Jenks: The complexion of our waste streams has changed very little over the past 5 years, and by design, our revenue streams have changed very little as well. We have made a conscious effort to keep a good balance of the lower margin but less cyclical streams with the more volatile but higher margin work.
Jim O'Connor: Since the company went public in 1998, our revenue mix has changed. We have moved our disposal and transfer portion of our revenue mix from 10 percent in 1998 to 19 percent in 2004. This is a reflection of our ongoing effort to integrate our marketplaces.
David Steiner: Our waste and revenue streams have remained fairly steady. If you look at our revenues over the past two years, we have had a steady increase from $11.1 billion in 2002 to $11.6 in 2003. Our business strategy has been based on building a platform where we can meet our business goals in a flat economy. Or if the economy improves, we can quickly adapt and be prepared to take advantage of an upturn. That has been our business plan for some time and it will continue to be our strategy. Our business consists of collection, landfill, transfer, waste-to-energy and recycling streams. The collection side, which is 57 percent of our business, is split between commercial (39 percent), residential (32 percent) and roll-off (29 percent). The residential side remains steady, and any changes we see would be related to population growth. The industrial and commercial side of our business is impacted more by overall changes in the economy.
WA: What are the future of trends and rates?
Ron: We'd all like to tell you that it's upward, but the reality is that it's market by market. At the end of the day, this is a local business. What happens in one market has very little to do with what will happen in another market. What determines what will happen with rates is what is going on in the local disposal situation. As you have landfill closures or tightening of landfill airspace in any given market, you're going to see an upward movement in rates. There are a number of markets in the country where that's happening right now — both large and small. Conversely, in a market where new airspace comes online, you're going to see a reversal in collection rates and the rates consumers pay. And there's a number of those markets. Over time, you'll see a gradual movement upward as the costs of compliance and the cost of capital continue to move up. But it's going to be market by market, and it will continue to stay a very, very competitive business. This is mostly a commodity business, and price is extremely important, if not the most important [factor], to the consumer. Anytime you get an imbalance, there will be a new supply, and prices will modulate.
Mike: We've seen some of everything. Franchise areas that love our service are happy to give us regular increases to cover increases in costs. Areas that are more price conscious want to see you get by without increases, want to see prices go down, and expect more and more efficiencies all the time. We've seen cities go out to bid, and some want the cheapest price they can get. Some want higher quality service and are willing to pay a little more for it. There's a mix of everything.
Jim Perry: We're hearing the P word more these days, and I believe there's a recognition that we're underpriced and undervalued as a service. Commodity I'm not — we provide a high level of service. We've gone through three years of that rationalizing; everyone has their house in order. And now with fuel and steel [prices] going up, there has to be a correlated improvement in pricing. The return on assets and resources employed are not what I would like to see, but we're seeing a movement in the pricing. Another phenomena is that companies are giving up customers who are unwilling to absorb some of the additional cost it takes to provide the specialized service that Mike was talking about. We have given up customers who are not willing to pay for the services they received. We're now giving great service to good customers who pay their bills and are willing to tolerate some pricing adjustment.
Mickey: Our industry is a $40 billion-plus industry, but it's very difficult to take that number and average it. It is really driven by the local environment and the local economics more so than any other business I'm aware of. [There were] more than 20,000 landfills [nationwide] within the last 15 years. We're down to less than 3,000. When you look in terms of it where there is ample capacity, we find pricing low vis-à-vis the South. Where you look at a one-way trip to a landfill up in the Northeast at 350 miles per, then the demand for capacity is reflective of the demand on pricing. The pricing in some markets is good, and the pricing in some markets needs to improve.
Bill: Prices are going up. It's local, yes, but it's also federal. We've got new federal abatement laws coming online. I don't know how you're going to site a landfill in the future with NIMBY [not in my backyard opposition] and all of these other principles out there. We have a 20-year, 40 million cubic yard expansion going in. We hope the state will agree to the thing before the new laws come in.
Paul: Rates can only go up as a function of the rapidly escalating fuel, benefit, bonding and labor costs. However, because of the extremely competitive nature of the market and the stabilizing effect of long-term, fixed-rate contracts, this may not be immediately apparent.
Jim O'Connor: Republic has been more aggressive in its pricing to address increasing costs. I think the industry will start to rationalize landfill and transfer station pricing and continue to increase rates at a modest rate to cover additional expenses.
David: When it comes to pricing, this is a very competitive industry that must be analyzed on a market-by-market basis. We have always looked for opportunities to improve pricing in all lines of our business. In 2003, we implemented a pricing program that focused on the commercial collection side of the business. Our corporate pricing team created analytics to determine when and where to implement price increases. These increases were then reviewed and approved by the field. This process has been successful, so in 2004, we're expanding that pricing program to other customer segments, such as residential subscription and landfills. We are confident that our price increase program will continue to excel.
How are you dealing with increasing costs such as for fuel and steel?
Mike: Our business is probably 70 percent from San Francisco and San Jose, so the high tech boom in the mid- to late-'90s drove labor costs up. There was a time we couldn't even find people willing to drive trucks for $30 an hour. Labor costs got driven up, health and welfare and pension costs got driven up, and then we had the bus and insurance costs go through the ceiling, and workers' comp costs in California went through the ceiling. Now, it's something different. I saw our fuel costs going up 20 percent for the month of April vs. March. I was told a couple of days ago by our equipment people that a 7-yard container that we paid $420 for a few months ago is now $830 — if they can deliver it because they can't get the steel. On the West Coast, we have the advantage of having the Asian markets right across the ocean from us to get rid of all the paper and other recyclable commodities, and they take all of our steels. We can't seem to get any for containers these days. Costs are going up. We have to deal with them, and we do.
Jim Perry: Rising fuel costs force us to look at each individual account. We have to look at the productivity side and the cost side, but when all is said and done, the fuel has to be recovered. We are passing [higher prices] through to our customers through an energy surcharge. On the steel side, companies who've maintained their asset base — the quality of their asset base — are in a good position. Companies that have maintained their containers and are sitting with good assets that are not required to buy a lot of new stuff right now are in a good position. But when you take a container that's going up 30 percent, it has to reflect in pricing. So we're going to keep promoting the idea that this industry has undervalued its services, and we have to have some pricing adjustment. That's my story, and I'm sticking to it.
Mickey: In the open, non-franchised areas, we have put a fuel surtax in across the board. We've done it for all lines of business, including landfills. In areas where we have franchises, we have already petitioned almost 300 of our cities on the fuel side. As we see steel and insurance and other costs increasing, we have become extremely sensitive to price increases and to our bidding and our proposals. I will echo Jim's comments: The pricing has to come up. The old adage that you can live off the landfill is just not carrying today in 2004.
Bill: Without a doubt, our medical is going up 15 percent per year over the next four years, which is very hurtful. Needless to say, we're debating whether we're going to put a fuel charge on because as soon as [fuel prices] come down two pennies, everybody will want it cut off. We just might as well put a general raise on [the prices of] all of our services. As far as the steel that's out there, we're still revamping a lot of old containers. We have such an influx and need for steel right now, we're putting containers out like hotcakes. We're putting [plastic carts] out everywhere, but that's an offshoot of the petroleum market.
Ron: I agree with everything everyone has said so far. Time will tell whether or not prices will go up. We're fortunate because of a decision we made two years ago that I didn't know would end up being a good decision. It's better lucky than good. Fuel has not affected Waste Connections because we entered into a multi-year purchase contract at a fixed rate around $0.79 a gallon plus state and federal tax by state for about 90 percent of our fuel. That goes through 2006, so right now we're very fortunate. However in that 15 percent of our fuel that's not fixed, we've seen a doubling [in prices] relative to last year. As your costs go up, unless you're willing to accept declining margins, you have to do something about it. We're attempting to do that on our competitive customers and in new bids. We believe the steel issue, much like the recycled commodities issue, will float back relatively quickly. Maybe not to the level it was, but it will not stay at this level for a sustained period of time. If it does, there are a lot of options. If you walk around the [WasteExpo] show today, there are a number of new, front-load plastic container companies out there. They're giving very long-term warranties that are cheaper than metal containers.
Paul: We, like other members of the industry, have seen a slight degradation in gross operating margins due to the escalating costs. We, however, have reduced other costs such as SG&A cost, and there has been a minimal impact on our business to date. Over time, I expect these costs to be passed back to the final customer in the form of higher rates.
Jim O'Connor: Increasing costs can have a dramatic affect on operations, and good companies are those that proactively manage these costs. Three years ago, we rolled out a route efficiency program called Route Smart. Over time, we have realized the benefits of this initiative, mainly a reduction in the number of miles driven and lower labor costs. Unfortunately, the rising cost of fuel has outpaced the beneficial savings and, subsequently, we needed to impose a fuel surcharge on some customers as we attempt to recover the higher cost of fuel.
The rising cost of steel also has an impact. As you know, most of our heavy equipment — trucks, containers and heavy equipment at landfills — is made of steel. We have seen steel prices rise 4 to 6 percent. To mitigate the rising price of steel, we pre-ordered a number of trucks, containers and equipment, which allowed us to lock-in at lower prices.
David: Our fuel costs are approximately 3 percent of our revenue, so fuel is not a significant cost item for us. In addition, we implemented a fuel surcharge in 2000, so the surcharge covers approximately 60 percent of our increased fuel costs. During the first quarter, we pre-purchased containers to guard against increasing steel prices. Because we purchase in large volumes from fewer suppliers, we are able to leverage our spend.
What is the nature of the competition in our industry?
Jim Perry: There's more of a rational approach in our market. We're in the Southeast, so it's not a global market, but I am familiar with it. Big companies and small companies are realizing that they don't need to practice anymore, and they are using more account-by-account analysis. [Waste] is a commodity, but we're focusing on value-added and waste-added value to our customers. We're focusing on giving great service to the people who want to pay a fair price. Let the competition have those accounts that are just not meeting our standards. There is a disconnect between other companies and what happens on the street, but we've always tried to take the approach that the smaller company can lead.
Mickey: Again, on a market-by-market basis. The Northeast responded well to the demands for recovery and increased costs. The states up there are using importation fees, if you will, or disposal fees as a taxing mechanism. When you're look in terms of Pennsylvania, we're paying somewhere around $12 per ton to $13 a ton to dispose of the waste material there. So I see pricing moving in the Northeast. I don't see the pricing moving in the South and Southwest. Like Jim said, the necessity of practicality will ultimately feed the demand for price increases.
Bill: The competition gets rough at times, and other times it doesn't. It was eluded to that we just let those low-price cities go. But at the same time, when you've got everything set up to do a city in such an amount of time, when you lose that section — even though it's a low-dollar figure — you're losing a lot. You're profitable with picking up that city at what you're getting for it, so when you lose that one section in there, it can screw up your whole system. Competition is tough right now.
Ron: This is a market-by-market issue, and it's driven by the local dynamics. Competition is alive and well. Many smaller, private companies are expanding and thriving in the last several years' environment despite recent economic conditions because the cost of capital is so inexpensive relative to where interest rates were three or four years ago. Equipment manufacturers are putting people in business that have effectively no payments on trucks and containers. So competition is very healthy in most competitive markets, which is a good thing for the consumer. We'd like to see it a little different at times, but it's a good thing.
Mike: In competitive markets in Los Angeles and San Jose, we're able to get our pricing up to cover costs and make a reasonable profit.
Paul: Competition remains as fierce as ever. While there is over-capacity in the disposal market on a national basis, I do not see this changing.
Jim O'Connor: There is still healthy competition in the waste industry. Any company that focuses on controlling costs and providing good customer service has the ability to compete in this business. We never take our customer for granted. We welcome competition because we are confident that we can provide the very best service in each and every market we serve.
David: This has always been a competitive industry, but competition is a good thing. When we're committed to raising the bar on customer service or investing in innovative environmental programs such as landfill gas-to-energy projects, waste-to-energy facilities or bioreactors, we are improving the image of the entire waste industry. We want our communities, public officials, regulators, investors and employees to know that this industry is made up of professionals who care about the environment and who are committed to doing the right thing. That image helps us all.
Editor's note: The continuation of this exclusive CEO Roundtable will be published in Waste Age's September issue.