Gathering of Suppliers, The

The solid waste industry largely has been focusing on widespread consolidation of independent hauling and disposal companies - particularly since Waste Management Inc. (WMI), Houston, and USA Waste Services Inc. merged in 1998, and more recently Scottsdale, Ariz.-based Allied Waste Industries Inc., and Houston-based Browning-Ferris Industries' (BFI) consolidated their operations. However, another less publicized - but just as noteworthy - change has been taking place among equipment suppliers and manufacturers.

To meet the expanded needs of now huge, consolidated hauling companies, equipment manufacturers have been working on their own mergers and acquisitions to improve efficiencies. According to the suppliers, growing strategically, as well as focusing on regional sales, distribution and service, allows them to better handle their larger customers' needs while reducing transportation costs.

The Mammoth Companies Just a decade ago there were more than 10,000 independent hauling companies. Although at least 10,000 haulers operate today, some estimate that less than half of those are independents. This has changed the way companies are buying, says Jack Legler, executive vice president of the Waste Equipment Technology Association (WASTEC), Washington, D.C. The new behemoths appear to be moving toward decentralized purchasing to allow regional managers and even some local units to make procurement decisions.

"We saw a centralized Allied and WMI going to a short list of suppliers and specifications," Legler says. "Now, the new WMI and Allied are looking at a new buying model that is more decentralized."

This decentralized purchasing model follows hauling companies' needs for diverse equipment. "In the early 1990s WMI tried to narrowly standardize its product specifications," Legler notes. "But different demographic, climate and regulatory conditions have necessitated variances in some types of solid waste industry equipment."

Other equipment types, such as balers and compactors, are commodities that do not require specialized technology to manufacture and are bought locally because cross-country shipping is cost-prohibitive.

Recognizing the need for regional buying, suppliers now are acquiring and placing facilities strategically around the country so that they can transport goods to customers quickly and economically no matter where they are located. It may be unprofitable for a Florida-based manufacturing company to service a California customer once transportation costs are included. But if that Florida company also has offices in California, it can meet its customers' needs across the country.

Regional Building Blocks "In order to service the big guys, we have to be big," says Ron McCracken, president and COO of Hi-Rise Recycling Systems Inc.'s Solid Waste Division, New York. "The only way we can provide better service and pricing is by getting big ourselves," he says of the company's acquisition plans.

Nevertheless, "while we're building a national company, we are continuing regional sales and service," McCracken adds. Between February 1998 and February 1999, Hi-Rise made four major acquisitions: Hesco Sales Inc., Miami, February 1998; Bes-Pac, Easley, S.C., October 1998; Acme Chute, Ft. Lauderdale, Fla. November 1998; and DeVivo Industries, Sandy Hook, Conn., February 1999.

The company's goal is to expand through a combination of internal growth and acquisitions, and to become the premier supplier of non-mobile waste and recycling equipment, products and systems for the waste handling industry throughout the world, according to Don Engel, company chairman and CEO.

"As customers consolidate, their needs change," says George Schneider, president and CEO of Wastequip, Cleveland. "Their demands on suppliers change and they order in larger amounts. Also, the service they demand is a little more exacting. They want faster delivery and larger amounts of equipment."

Wastequip, which manufactures trailers, containers, hoists, balers and compactors, was founded in 1989, made its first acquisition in 1991 and has added 10 since. With a vision to consolidate the waste equipment industry, the company has grown at a rate of more than 20 percent per year and now is a $100 million-plus corporation targeting larger hauling companies.

"Large customers benefit from dealing with large suppliers," Schneider says. "Many companies in this country are reducing the number of suppliers they are dealing with. It's a trend I think will follow in this industry. There appear to be economies of scale in making large orders. The trend is to do more business with a smaller number of suppliers.

"We feel that consolidation offers us the opportunity to provide better products and services," Schneider continues. "It is a more effective way to go to market and allows us to provide better pricing. We're more efficient internally, and that's a very important factor. The kind of equipment we provide is relatively low value-added so transportation is a factor. That is one of the reasons we have 17 plants across the country."

More Companies, Less Costs Schneider is not alone in his thinking. The theory is as hauling companies grow, they will need larger suppliers to meet their needs, providing them better service and economies of scale.

That's one of the reasons why Marathon Equipment Co., Vernon, Ala., has been successful, says Ed Frunari, president. "I do see national accounts demanding contracts," he says. "They are looking for one price and one freight charge. The only way you can do that is to have plants strategically located in the United States." Marathon, which manufactures balers, compactors, hoists and containers, has a 24-year-old Alabama plant and a West Coast plant that has been operating for 14 years.

"A local competitor can beat you out on price," Legler says. "There always will be a geographic limit outside of which transportation costs will adversely affect your price competitiveness.

"These [products in the solid waste industry] are not high-tech products," he continues. "A good manufacturer can ramp up and be producing quality products in a short amount of time." For example, McNeilus Companies, Dodge Center, Minn., entered the solid waste industry in the early 1990s and became a force in just one year, he says. (McNeilus Companies Inc. was acquired by Oshkosh Truck Corp. in February 1998.)

With this in mind, it appears that manufacturers believe that the best way to build a network of regional facilities is to acquire operations instead of building them from the ground up. As with the haulers, consolidation in the equipment sector largely is being done by a few large players. However, what happens after the consolidation is slightly different, Legler says.

"Large companies are buying other companies but leaving the top management in place," which is different from what we have seen hauling and disposal companies do, Legler adds. "[As manufacturers buyout other companies,] the general managers still are running these production facilities as if they still were separate units."

Look Who's Buying Wastequip looks for future acquisitions that fit its company philosophy, Schneider says, noting that the company researches about 20 companies each year but only purchases two to three. "We look for companies with good products, a good service reputation, longevity and a good geographic location," he says. "We also are interested in management that might wish to stay."

Two of its most recent purchases - Holt Specialty Equipment, Eagleville, Tenn., and Rayfo Inc., Rosemount, Minn. - have fit this model of strategic locations, strong management and complementary product fit. When Holt was purchased, Schneider praised it because it fit closely with his company's own product offerings and had a strong management team Wastequip could keep.

In 1998, when Wastequip purchased Rayfo, it added four manufacturing facilities in Minnesota, Wisconsin, Illinois and Ohio, "giving us a strong position in the upper Midwest to complement our existing plants in other parts of the country," Schneider said in a press release.

Hi-Rise, Miami, follows a similar model. "When we make acquisitions we bring key managers in that can help us take the company to the next level," says Gary McAlpin, chief operating officer. "We balance the skill levels of our team and combine them with strong manufacturing operations, industry knowledge and the sales expertise of the new company."

Another large company with a hands-off approach that has been gobbling other companies in the solid waste industry is Dover Industries (through its Elgin, Ill.-based Dover Corp. division), a cash-rich manufacturer of industrial products with sales of more than $4 billion in 1998 from its 45 separate businesses in several industries.

Heil Environmental Industries Ltd., Chattanooga, Tenn. and Marathon contributed to the Dover Industries division's 20 percent increase in profits in 1998.

While no one at Dover was available to comment on the company's acquisition plans or position in the solid waste industry in the U.S. market for refuse trucks, Heil's position is strong, as reflected in a 24 percent increase in shipments, according to the company's recent annual report.

Heil has been in the acquisition mode - most recently purchasing Parts Inc., Piedmont, S.C., a supplier of aftermarket repair and replacement parts for the refuse vehicle industry - to fuel its growth. Keeping in line with Dover's approach to keep existing management in place after an acquisition, Parts Inc., although owned by Heil, will continue to operate as a stand-alone business.

"Our strategy is to be a one-stop shop for our customers in terms of parts," says John Craig, vice president and general manager of Heil's refuse group. Parts Inc. carries not only Heil parts, but also those of competitors. "People have asked why we would want to sell competitors' parts, but the idea is to get our customers' trucks back on the road," Craig says.

Marathon, another Dover company, also has chosen to grow by buying its competition or going into a new product line through acquisitions. In March 1999, Marathon purchased Reduction Technology Inc., Leeds, Ala., a manufacturer of tire shredders, grinders and granulators for $300 million.

"They have about a 1 percent share of the market. We have the potential to grow that," Frunari says.

"We have four plants that we control within our own group," Frunari adds, noting that every Dover company makes its own business decisions. "We are spending a half million dollars to expand our Nevada plant. We let our group know what we're doing, but they don't say yes or no."

With both smaller companies and acquiring giants like Dover, what does the future hold for the solid waste manufacturing sector?

"Like other areas of the industry, the consolidation of manufacturers is cyclical," Craig says. "I think the larger manufacturers are going to get larger, but I don't think the small niche marketers are going to go away either." He says this is similar to the hauling sector where casualties of previous mergers are starting to get back into the business. "A lot of the non-competes have expired, and people are getting back into the business as private haulers," he says.

Frunari agrees. "That game has been played for years and years," he says. "WMI may sell a route or territory to BFI. Also, you'll find new, fresh companies that have cash flow that will start up and become larger companies."

And while mergers and acquisitions in the equipment supplier/manufacturing sector are occurring, there hasn't been the same widespread consolidation that the independent haulers have experienced, Legler says. In the past five years, WASTEC has lost about 35 of its members to consolidations, but those since have been replaced by start-ups. So, Legler says, "Until the market sorts itself out, you really can't predict what will happen in the future.

As many manufacturers in the solid waste industry get larger and more geographically diverse, the opportunity for distributors is growing.

Don Link, president of Link Environmental, Winamac, Ind., says a number of manufacturers are geared to sell direct to the hauler or disposal company, increasing the stakes for direct to end-user sales. "What we have to do is continue to add value to the sales," he says. "The majority of customers still like to deal with local people. Manufacturers can't service a customer as well as a distributor can. The distributor is right there at home."

Link Environmental covers Indiana, part of Michigan and part of Ohio, offering a full line of products for the transportation part of the waste industry. According to Link, some manufacturer-oriented companies are now looking at direct sales, which can take some profits away from the distributor.

However, "If the hauling companies stick to their businesses, they'll still need a good distributor to install and service this equipment," says Ed Frunari, president, Marathon Equipment Co., Vernon, Ala. "We find the distributors to be handy. They have a place as the middleman between the manufacturer and the hauler."

About half of Marathon's sales are direct to the hauler and half are through distributors. "We have a distributor price and a hauler price," he says. "The industry is leaning toward the distributor network."

The construction and demolition (C&D) recycling subset of the industry has been crunching more than concrete recently as several of their equipment manufacturers have been acquired.

One of the largest was the purchase of venerable Cedarapids by Terex Corp., Westport, Conn., for an announced sale price of $170 million. Cedarapids, a Cedar Rapids, Iowa-based pioneer in supplying recycling equipment, was sold by Raytheon, Lexington, Mass., because it did not fit in that company's high-tech and high-flying portfolio. However, Cedarapids, which manufactures a line of crushing, screening and paving related-equipment, will fit nicely in Terex's group of heavy equipment firms. Terex already has started to trim Cedarapids, announcing that about 100 jobs have been cut so far, primarily middle management and support functions.

Terex also recently purchased O&K, which had a U.S. office in Austell, Ga., primarily a manufacturer of heavy mining equipment. Terex also has taken over Powerscreen, which has a strong presence in recycling thanks to its ubiquitous screening machines. All together, Terex's parts have the makings of an industry powerhouse capable of going toe-to-toe with the other industry heavyweights - Astec Industries, Chattanooga, Tenn., and Svedala Industries, Malmo Sweden.

A formidable force, Svedala owns and operates Universal Engineering, Cedar Rapids, Iowa, another pioneer in concrete/asphalt recycling equipment; its own crushing/screening equipment line, which mostly is for aggregate; and a French shredder company. Nearly two years ago Svedala bought Lindemann, Dusseldorf, Germany, which is in the baler, metal recycling and heavy screen business. (Svedala reportedly was bidding on Cedarapids, but lost in the end).

Keeping with the trend, Astec has been assembling a wide range and number of companies that manufacture recycling equipment, including some businesses that overlap, such as crushing equipment makers Kolberg-Pioneer, Yankton, S.D., and Telsmith, Mequon, Wis. Early in September 1999, Astec announced it had purchased Teledeyne, Solon, Ohio, a manufacturer of breaker and pulverizer attachments for excavators.

So far, the acquired companies have been allowed to remain separate and pursue their own business goals, and why not? The method has been successful - Astec recently announced that its second quarter net income was up 51 percent to a record $11.2 million, for example.

Smaller purchases make sense, too. For example, when Lippmann-Milwaukee, Wis., took over Rockford, Ill.-based Kurtz Manufacturing's line of horizontal shaft impact crushers, its ability to compete against the big players improved. Lippmann long has had a well-respected jaw crusher and screen line, but it did not have the second-stage crushing option to offer its customers until now.

And just when you thought Peoria, Ill.-based Caterpillar Inc.'s influence in the recycling industry couldn't get any bigger, in the past couple of years the company has purchased two excavator attachment companies whose equipment is important to C&D recyclers. Balderson, Wamego, Kan., makes hammers for breaking concrete and other aggregate-related products. Veratert, in the Netherlands, which Caterpillar purchased just 18 months ago, manufactures concrete pulverizers, hammers and grapples - equipment all used by C&D recyclers.

Despite the action, it's important to note that while equipment manufacturers may be consolidating, the C&D industry is not. It remains a very fragmented, mom-and-pop market where virtually no company owns more than 10 plants - whether they're involved in mixed C&D waste or concrete/asphalt processing.