December 28, 2014
The end of the calendar year marks a natural point to assess where we’ve been and where we’re going, so we’ve asked four longtime industry observers to offer their insights into where they see the industry heading in 2015. Their comments reflect an industry that’s gradually getting stronger and moving toward more recycling and diversion approaches—but often at an incremental pace, and with challenges ahead.
States of legislation
On the legislative and regulatory front, lots of activity is being predicted for 2015—much of it on the state and local side.
Recycling will continue to carry strong interest in various state capitals next year, says David Biderman, vice president of government affairs/chapter operations and general counsel for the Washington, D.C.–based National Waste & Recycling Association (NW&RA). “Whether that’s through new, higher recycling goals or restrictions on certain types of materials being allowed in the municipal solid waste stream such as increased organics/food waste restrictions,” he says, “I would expect that we will be seeing more of those bills in 2015.”
But that doesn’t ensure recycling progress, says Chaz Miller, director of policy/advocacy for the NW&RA. “Hopefully legislators will realize that while policy is important, just passing a law doesn’t guarantee that things change. We’ve learned the hard way that aggressively high recycling laws often lead to pretty aggressive recycling reporting. Or, if you prefer, form over substance.”
Organics will continue to be the key to increasing recycling in 2015, Miller predicts. “And then,” he says, “how do you write law that will not just guarantee collection but will guarantee somewhere to take them?” He hopes the industry will put more infrastructure plans into place in 2015.
Biderman sees more action occurring regarding extended producer responsibility (EPR), possibly through increased marine debris legislation. Miller believes that paint is the most likely material that will be the subject of 2015 EPR bills. But again, passing an EPR bill won’t necessarily solve the problem. People have to get in the habit of putting aside the products for takeback. “It’s an extraordinary challenge to consumer behavior,” Miller says.
Biderman also sees continued progress in 2015 on the NW&RA’s driver safety legislation push, the “Slow Down to Get Around” campaign, with legislative activity in at least five states next year. “With the recent federal data indicating that there was a significant uptick in the number of collections fatalities, we hope that there will be a favorable reception to our message,” Biderman says.
A number of states are aiming to update their existing solid waste legislation, and NW&RA will be involved in that as well. The association expects local governments across the country to implement flow control measures to direct waste management. “We continue to oppose those misguided efforts,” Biderman says.
New York City and the nation
New York City will be a major focus of waste and recycling legislative debate in 2015. The city recently reintroduced legislation to reduce waste transfer station capacity in the city, and the association expects hearings on the topic early next year.
“We oppose that legislation for a number of reasons,” Biderman says. “If they’re successful in reducing transfer station capacity, that means there’s going to be fewer jobs for people in Brooklyn, the Bronx and Queens. And these are well-paying jobs that would be lost. It’s going to increase truck traffic in a lot of neighborhoods because garbage doesn’t just disappear because you don’t let it go somewhere; it has to go somewhere else. Finally, it’s going to increase waste disposal costs.”
The other big issue looming in New York City is a push by some for commercial franchising of waste. “We are in opposition to that as well, because more than 100 carting companies likely would be forced out of business if they franchise in the city, which will put several thousand people out of work,” Biderman says. “We need to demonstrate to the advocates for this bill that there are already tools for reducing truck traffic on city streets that the city isn’t using.”
On the federal level, Biderman sees a couple of issues for the waste and recycling industry. One is the Highway Funding Bill, which will expire next May. He hopes that review can lead to a broader discussion about transportation policy that could benefit the industry. Another topic that he expects Congress to address is tax reform, which he hopes can include a renewal of expired tax breaks for alternative fuels and landfill gas.
The election in November brought a not-unexpected victory for the Republicans, who then took control of the Senate. But Biderman believes it won’t have a dramatic effect on legislation next year because the GOP won’t have enough votes (60) to dictate legislation.
Miller says the election made for some interesting twists for 2015. Maryland surprised many people by electing a Republican governor. The previous administration had a zero waste strategy. “That doesn’t mean there won’t be recycling legislation filed in Maryland,” Miller says. “But, obviously, with the change in administration, it’s going to be coming from a different direction.”
Republicans gained control of the Minnesota House of Representatives and the New York State Senate, which Miller believes will have a significant impact on environmental legislation in those states—not necessarily in a bad way, but there will need to be compromise between the two parties. ”There’s a feeling that Republicans are anti-environmental. That’s simply not accurate,” he says, pointing out that the EPA (the U.S. Environmental Protection Agency) became a reality under Republican President Richard Nixon.
Also, 2015 tends to be a budget cycle year for most states, Miller says. “And as a result, in most states the legislators tend to be much more focused on the budget than on other issues—which means you’re more likely to see environmental-based legislation in 2016 than in 2015.”
On the regulatory side, Biderman sees a continuing focus on finalizing regulation before the Obama administration’s term is over at the end of 2016. And the process for approving rules takes a long time. “We expect there to be a continued high level of regulatory activity by the EPA and other agencies next year as they move to either propose or finalize rules before the end of the Obama administration.”
One important piece of legislation is the effort to greatly expand the Clean Water Act. “That’s likely to be a topic of some controversy between environmentalists and the business community in 2015 and 2016,” Biderman says.
Harvey Gershman is president of Fairfax, Va.–based Gershman, Brickner & Bratton Inc., a solid waste management consulting firm with an eye toward sustainable solutions such as waste conversion and recycling. “I think there’s going to be more focus on collection of recyclables,” he says. “How many separate collections do people have, and how efficient are these new mixed waste processing facilities?”
There is also the issue of single-stream collection vs. source-separated. The implications of this choice will be economic and social. Both waste processors and consumers are going to have to show they can make one system work better than the other.
The collection issue ties into waste conversion, which has gained a lot of proponents as a sustainable waste management option, but has yet to prove itself economically viable. Gershman points out that waste conversion requires some front-end processing, and with mixed waste processing the degree of recovery of recyclables can vary. “If the waste conversion technologies show that they can work, and the economics are viable for a particular community, it provides an interesting alternative on the collection side,” he says.
Material associations are concerned about the quality of recyclables currently coming through on collection. “And they should be,” Gershman says. “So that needs to be sorted out.”
Anaerobic digestion (AD) is another area of the industry that will get increased attention in 2015. “As systems get implemented here, understanding their costs will be important,” he says. Making determinations about which types of systems to implement and how food waste should be collected are among the decisions specific to AD that waste management officials will need to address in the coming year and beyond.
On a larger scale, Gershman would like to see an update to the country’s primary solid waste management policy, the Resource Conservation and Recovery Act (RCRA), to provide incentives for less waste to go to landfills. “That would be nice,” he says. “Whether it’d be in the form of tax benefits from investments made for manufacturing products for the United States as opposed to exporting recyclables to other countries, or making it less economical for us to send waste to landfills, such as banning organics in landfills or taxing landfills more like they do in Europe and the United Kingdom. These are policies, I think, at the federal and state level should be revisited if we really want to see less waste go to landfills.”
But whether that will happen, he can’t say. “Local governments are under continuing financial pressure to spend less and be more sustainable at the same time,” he says. “These are conflicting objectives. Being more sustainable today costs more money in a lot of cases, particularly with garbage.”
Financial forecast: Gradual warming
The most recent round of financial reports by the major publicly held waste and recycling companies showed that pricing and landfill volume remain positive; churn, or customer turnover, is occurring at a stable pace; and commercial waste volumes are improving, says Michael E. Hoffman, managing director of institutional equity research for Stifel, Nicolaus & Co. Inc. of St. Louis, Mo., and a longtime industry financial analyst.
“The third-quarter data suggests that the trend is not a hockey stick, but it’s a gradually improving line,” he says.
“So the outlook in ’15 would be: Reported pricing’s going to … run in the 2 percent to 3 percent range; volumes should be positive, and you’re probably talking [about] a better than 1 percent, kind of in the range of 1 percent to 2 percent. So if I banded it, I’d say 3 percent to 5 percent is the topline growth opportunity.”
He says the major waste and recycling companies likely to be at the top end of that range are Waste Connections Inc. in The Woodlands, Texas; Progressive Waste Solutions Ltd. in Vaughan, Ontario; and Ponte Vedra, Fla.–based Advanced Disposal. On the low-to-middle end of that, says Hoffman, are Houston–based Waste Management Inc. and Phoenix–based Republic Services Inc. Hoffman says Waste Management may fall below even that range because of its pricing and volume strategy. But the company also may be setting the expectations bar low at this point, providing extra incentive to pass that level.
A big factor for the economic fortunes of the industry overall in 2015 is consumer buying behavior. “The consumer found its footing 18 months ago; there’s clear evidence of that,” he says. “It has gained a modest level of incremental confidence since, which has led to this volume growth pattern in MSW (municipal solid waste). Because everything from casual dining to shopping to your daily trip to Starbucks, Dunkin’ Donuts, whatever ... are you more inclined to actually eat out than you did two years ago? The economy’s seeing that. That’s why the 2 percent growth is becoming more a 2.5 percent to 3 percent [growth]. It’s no longer a 1 percent to 2 percent in GDP [gross domestic product], but it’s not a 3 percent to 5 percent underlying GDP,” he says.
Profitability should get better in 2015. “The group collectively believes it will be more profitable in ’15 than it is in ’14, based on things that they’re controlling, and assuming that you don’t get any help from commodity prices,” Hoffman says.
Waste and recycling companies have done such a good job with fuel surcharges that they now are basically indifferent to oil price fluctuations. The conversion trend to compressed natural gas (CNG) to fuel industry trucks will continue strong.
Regarding M&A, “It looks like the deal market is back,” Hoffman says. Three factors contribute to that evolution, he says. In the first two cases, conditions have gotten better; in the third case, sellers have resigned themselves to the idea that it’s not going to change.
First, the trailing 12-month earnings before interest, taxes, depreciation and amortization (EBITDA), which is a measure of a company’s financial health, have generally gotten stronger. “Business is better,” he says. “And so they have a better number on which you’re doing an evaluation off of.”
Second, public market valuations of the waste and recycling business are back to the high end of long-term trading ranges.
The third factor is interest rates. It’s “the one thing that hasn’t changed that they were hoping for,” says Hoffman. “But [which] I now think they’ve given up on.” The continued low rates have discouraged some of the low-risk options for reinvesting, like Treasury funds.
“That got in the way of deals for all of ’13, part of ’14,” Hoffman says. “But you’ve seen enough improvement in trailing 12-month EBITDA that sellers are starting to go, ‘Okay, based on what you’re buying me, my EBITDA has now gotten to a place where I can get my $20 million’ or whatever price the seller is looking for.”
And all of these factors could very well lead to more buying and selling in 2015. “Everybody’s talking again,” Hoffman says. “I’m not predicting some big wave of consolidation, but I think you can see a lot of little deals in ’15, and maybe the odd piece like the [Waste Management aquisition of] Deffenbaughs.”