Picking Up the Signals: 2012 Waste Collection Roundtable

While virtually every waste company must continue to battle to cut costs and squeeze profits from hard-won revenue, only the large national public companies seem to sense the much discussed slow but consistent recovery.

Regional companies by and large are not as quick to see the uptick in their business, despite the fact that macro-economic indicators are indeed improving. To get a sense of how rough it is out there, Waste Age asked three waste services firms to talk about their businesses — what happened in 2012 and their outlook for the new year.

Topics covered in this email roundtable include trash and recycling volumes, recycling commodity markets, the weak recovery or continuing recession, green initiatives, alternative fuels and 2013.

The roundtable participants include:

Waste Age (WA): Have your commercial trash disposal volumes increased substantially this past year compared to recent years? How do you explain the trend?

Brown: In the results for the third quarter, we said that on a workday adjusted basis, our volumes in the core solid waste business were positive for the third consecutive quarter. So, as has been the case through the year, our core solid waste business continues to perform well and we are seeing some positive trends as we approach 2013.

Coulter: No. While Peoria and Champaign-Urbana have been good, stable markets for us, volumes have remained flat for the last two or three years. We’re seeing as many bankruptcies and closings as new business openings. The construction reports I’ve seen don’t indicate much commercial development. Most of the work today is university, government and healthcare. So our market is basically flat.

Habets: The short answer is no. Year-to-date (YTD) average weight per lift is 402 pounds (lbs.), almost identical to 2011. In 2008 it was 400.2 lbs./lift. In 2010 we saw a dip to 389 lbs./lift, but that was primarily driven by the 2009 North Carolina All Beverage Container (ABC) landfill ban on beverage containers (glass, plastic and metal.) All in all our data suggests that our customers are not producing more garbage as a result of any kind of upturn in the economy.

WA: Have your commercial recycling volumes increased substantially this past year compared to recent years? How do you explain the trend?

Brown: Adjusting for one less workday in the third quarter, volumes were positive 0.5 percent. We saw positive volume growth in each of our industrial, MSW (municipal solid waste), C&D (construction and demolition debris), special waste and recycling operations.

Coulter: By and large, our recycling volumes are flat. More and more companies are starting programs that may drive volumes up a little, but not many communities have ordinances requiring recycling. So nothing is really driving volumes now.

Habets: Commercial recycling data suggests that our commercial customers are generating more recyclables but that is not the case in the majority of our footprint. The primary cause of this anomaly was the 2009 North Carolina Alcoholic Beverage Control Commission (ABC) landfill ban on beverage containers from ABC permitted facilities. It created a big recycling demand from bars and restaurants in North Carolina.

We have a very large commercial collection business in North Carolina, and this magnified the overall impact on our results. Since the ban, there has been little if any enforcement, and consequently demand for this recycling service has waned. In 2008 the system average weight per lift was 27.61 lbs. per lift (carts and front-loader containers). In 2010, the year following the new ABC landfill ban, it was 33.86 lbs. YTD we are experiencing a slight decrease to 33.1 lbs. per lift.

WA: How would you evaluate the markets for recycling commodities?

Brown: In order to see the effect that commodities will have on our full-year results, we look at both our recycling and waste-to-energy operations. With respect to recycling, when we gave our initial guidance at the beginning of the year, we expected commodity prices to have a negative impact of about $0.04 per share for all of 2012. Through the first nine months of 2012, we have incurred a negative year-over-year impact of $0.14 per share from commodity prices. In the fourth quarter, we are expecting an additional $0.04 per share of headwinds from recycling commodity prices. So for the full year, recycled commodity prices will create about $0.18 of headwinds versus our expectation of about $0.04 cents, a $0.14 cents difference.

Recycling commodity prices and natural gas prices have stabilized recently, with recycling commodity prices actually up modestly in the last few weeks. Given our current outlook for relatively stable commodity prices for full-year 2013, we do not expect significant headwinds from commodity prices for the full year 2013.

Coulter: The recycling commodity markets are the worst since 2009. Just the other day, we received an email from a recycling plant that wants to charge us $50 per ton for single stream. Last year at this time, they might have been paying us for single stream tonnage.

This has been going on since July, when we started to see the commodity markets start down. And now China has shut off demand again. Of course, we rely too much on China to take material, but we definitely need that export market.

Habets: After tanking to $20/ton in January of 2009, OCC (old corrugated cardboard) prices, along with commingled recyclables, saw very strong price appreciation right up to the third quarter of 2011.The high value of commingled residential recyclables during 2009 – 2011 sucked a lot of people into building commingled material recovery facilities (MRFs).

As a result, our service footprint right now has a lot more sorting capacity than needed. Only one or two MRFs are running more than one shift. We avoided this pitfall by negotiating floor pricing for our commingled recyclables with a number of 3^rd party MRFs.

In addition to negotiating floor pricing for loose and baled OCC, we have hedged our OCC to avoid the price valleys. While we miss the occasional upside associated with the peaks, we at least have earnings predictability. Actually, we’ve been handling OCC like this since 2004.

WA: Most economic indicators show a slow but consistent economic recovery. How are you seeing this reflected in your business?

Brown: Year to date, volumes through the third quarter are positive and, as such, we still expect to achieve our full-year volume guidance of flat to slightly positive volumes.

Coulter: We’re not seeing slow but consistent recovery. It’s a struggle today. Costs continue to rise. Wages and compliance costs rise every year. Healthcare costs are skyrocketing. Workers’ comp claims are skyrocketing. At the same time, customer loyalty is at an all time low — they’re focused on costs as well. All of us are focused on costs and trying to get through this tough period.

Habets: Our industry is like the canary in the coal mine. Declining collection, waste and recyclable volumes says it all about just how robust the economic recovery actually is. In our footprint we do not see many signs of increased commercial businesses activity. Our Atlantic coastal markets continue to experience business closings. Driving by strip shopping centers, you see a lot of vacant stores. 

Our people in the field say that it is rare for a local city council or Chamber of Commerce to announce new business startups these days.

We do see some green shoots in a few of our markets, but you have to look hard to see them.

Overall, customers are much more cost conscious than they were back in 2007. As a result commercial pricing today is not very sticky. I believe many of our customers are still struggling with the current economic climate. The reduced demand, a result of the ongoing anemic economy, is being serviced by an industry that still has excess collection and disposal capacity. This classic supply/demand imbalance has led to some of lowest price offerings I’ve seen as some public companies try to reverse the declining volumes they are reporting.

The C&D side of business is also just a fraction of what it was in 2007. We are seeing some multi-family construction activity in some of our markets, but much like the commercial product line it is a classic supply/demand imbalance leading to depressed collection and disposal pricing.

WA: Are you seeing continued increases in zero-waste goals and other green initiatives from your commercial clients? What are these initiatives and how do they require you to modify the services you provide?

Brown: Our customers, our investors, our communities and our employees want to know that the waste they generate is handled in the smartest ways possible. At Waste Management, we are on a mission to maximize the resource that is the waste we manage, and to minimize environmental impact in everything we do. That means partnering with our customers and communities to manage and reduce waste while recovering valuable resources every step of the way, including creating clean, renewable energy wherever possible.

WM is increasingly focused on extracting value from what our customers discard.

Consumer-facing recycling solutions include sorting like single-stream technology, which increases volumes from users. We also engage consumers with programs like Recyclebank, which are designed to incentivize increased recycling.

We are responding to the segmentation of the waste stream with offerings like Lamptracker and 36 new compost facilities.

Recycling conversion technologies are also increasing the recapture of recyclable material. We are developing new segregated waste streams, and investing in value-added products (e.g., Garrick and Microgreen).

WM even converts some of the post recycling waste stream into value-added energy and chemical products (e.g., Enerkem, Agilyx, Genomatica)

Coulter:From a commercial point of view, we don’t see much demand for zero waste. Companies that want to be sustainable are willing to put in some extra effort. They will change certain processes or go to single stream recycling, but no one is knocking down our doors with plans to go to zero waste.

Habets: Between 2005 and 2009 the majority of our industrial customers who wanted to convert to zero waste completed their conversions. By and large, commercial customers in our footprint have not embraced this. We attempted to offer onsite food digesters and food composting services, but there were very few takers. 

WA: How is the increased focus of commercial and residential customers on recycling changing the balance in your business between disposal and recycling? What will this mean to your business in the long term?

Brown: Our industry is changing and so is our world, providing us with an opportunity. Less waste is being generated in our country for the first time in decades due to a variety of factors, from the economy to demands from customers, competitors and government regulations. Everyone is more interested in where garbage goes. What seemed simple 20 years ago isn’t that simple anymore. Times have changed and so have expectations. This is changing our industry and our world. And that is where the opportunity lies. As the world changes, we are changing with it.

Coulter: In our market, most companies want single stream recycling — they want to recycle many products, but it must be easy. Our commercial single-stream recycling program has grown very popular in recent years.

If you analyze our residential single-stream recycling program, you can see the impact on the balance between trash and recycling volumes. I estimate that one household recycles 25 pounds every other week. That totals about 650 pounds per year. [At that rate,] for every three households that recycle, it eliminates 1,950 pounds or about one ton of landfill disposal. In Peoria, there are 40,000 homes, and 10,000 of them recycle. So Peoria is diverting about 3,000 tons per year from the landfill.

Habets: As I mentioned earlier, there was some interest following the landfill bans in North Carolina but it quickly leveled out. There has been no recent increased focus on recycling, composting or reduction by the commercial customer base in our footprint except in North Carolina where OCC and beverage container landfill bans created demand for this service. Our experience is that in all of our other markets the commercial customer, by nature cost conscious, is focused primarily on minimizing cost.

As residential recycling collection volumes improved dramatically over the past six to seven years, we converted to 65-gallon and 96-gallon recycling carts. At the same time, we’ve seen our weight per lift for residential trash decrease from 38 pounds per lift to 32 pounds. While the increased recycling is responsible for most of the decrease in trash generation, the anemic economy has also played a role. People out of work don’t buy as much stuff!

WA: Are you considering — or have you undertaken — an initiative to convert your commercial fleet to alternative fuels? Why or why not? If you are considering this, what fuels are you thinking about?

Brown: We spend approximately half a billion dollars annually on our fleet. We’ve begun to convert our trucks to compressed natural gas (CNG). Going forward 80+ percent of that spend will go toward converting our fleet to CNG trucks.

WM has approximately 32,000 collection and support vehicles. By the end of 2012, we will have 2,000 natural gas vehicles at 40 sites in 22 states and two Canadian provinces – the largest heavy-duty natural gas fleet in the United States.

Replacing diesel with natural gas is in part a result of one of our corporate sustainability goals to reduce emissions by 15 percent and increase our fuel efficiency by 15 percent by 2020.

For each truck we replace with natural gas, we save 8,000 gallons of diesel fuel. These vehicles are also 50 percent quieter than diesel trucks, which is very popular with our municipal customers.

We have built public natural gas fueling stations in 14 states.

Given that the spread between natural gas and diesel is at historic highs, this makes economic sense for us. The United States has huge supplies of natural gas, and we are pioneering using it in the transportation business. Natural gas is key to U.S. energy independence.

Coulter: Yes. Right now we have three CNG commercial front-loaders.

We’re seeing more benefits from commercial CNG front-loaders than in residential collection trucks. The commercial trucks run more mileage and do not stop and go constantly. While CNG trucks cost significantly more, we’re saving a significant amount on fuel.

We built a slow-fill CNG fueling station for our route trucks. At end of day, they connect to lines and fuel for six to seven hours each night.

We also built a fast-fill fueling station that our commercial collection trucks use when they need fuel to finish their day.

We’ve opened the fast-fill station to the public, and we’re selling an average of 700 diesel equivalent gallons of CNG per day.

While the industry has led the charge for CNG vehicles, we would all like to see more tax incentives to help continue the conversion.

Habets: We completed the CNG conversion at our Durham, N.C., branch in the second quarter of 2012. For the foreseeable future we plan to convert at least one branch per year to CNG.

Our second CNG conversion is scheduled for the second quarter of 2013. The trucks are expected to arrive in between now and March, and the fueling station will be completed in early April 2013.

When we convert a branch to CNG, we acquire all new collection vehicles and upgrade the shop so it can safely service a CNG within the building.

WA: Looking ahead to 2013, what challenges will you have to address? Challenges might include fuel costs, fleet replenishment, labor shortages or other business matters.

Brown: With our recent restructuring anticipated to reduce costs by $130 million in 2013, our other cost programs picking up steam, and our focus on pricing to improve yield over our 2012 results, we expect to see earnings and cash flows strengthen in 2013. We will give further guidance with respect to 2013 when we release our fourth quarter 2012 results.

Coulter: A key challenge for independent companies involves combatting increasing costs in our industry in combination with price-cutting by the large national companies.

All in all, I think it will continue to be price sensitive business environment, with companies doing what they can to survive. That is challenge number one.

Habets: Challenges will include gridlock in Washington and the continuing anemic recovery. In addition, we’re dealing with aggressive price competition from large public companies as well as medium and small companies. Finally, we’ll be working to properly integrate acquisitions that we’ve made and battling a shortage of competent truck technicians. By and large, these are the same kinds of challenges we’ve been facing for the last four-plus years.