NEW WAVE

Michael Fickes

RECENTLY, THE WASTE INDUSTRY witnessed what seemed like an '80s flashback. Yet instead of Pac-Man gobbling dot after dot or haulers digesting other haulers, it was equipment manufacturers that were trying to increase their share of the solid waste pie in the 21st century.

One of the most notable examples of this occurred with Federal Signal Corp.'s acquisition of two major waste truck body manufacturers — Wittke Inc., a publicly held Canadian manufacturer of front and side loaders and Leach Co., Oshkosh, Wis., which makes rear loaders. In October 2002, Federal Signal, Oak Brook, Ill., paid approximately $102 million in cash and stock for the two companies and promised improvements in distribution, service, and research and development.

At the time of the acquisition, observers said about three-quarters of the total amount paid went for Wittke, the larger of the two companies. Today, both brands operate under their own names, and Federal Signal boasts a more complete line of truck body offerings.

Larry Baker, analyst with Legg Mason, Baltimore, Md., says Federal Signal executives had been eyeing the waste truck business for several years. “I think they waited until both Wittke and Leach became available because they felt that going in with just part of a line would sell the idea [of entering the waste equipment market] short,” he says.

A Good Fit

The acquisitions were designed to help Federal Signal boost the company's private industry focus so that it can tailor sales and service offerings to better match large and small private and public customers, according to Joe Ross, company chairman.

Federal Signal has substantial experience with municipal and state customers across its four business lines. Particularly, Federal Signal has earned a good reputation through its Environmental Products Group (EPG), which manufactures street sweepers, industrial vacuuming equipment, sewer cleaning vehicles and water blasting equipment.

“We have always felt the (waste) industry was a good fit with what we do well,” Ross says.

Leach and Wittke now operate under the banner of EPG, which generated $296 million in revenues in 2002 and ranks as Federal Signal's second largest line of business. That year, approximately 74 percent of EPG's sales went to municipal and state customers. Industrial and commercial sales accounted for the balance.

Leach's traditional municipal focus and Wittke's private industry strengths complement each other so that Federal Signal can “benefit from sharing their engineering knowledge and manufacturing techniques,” Ross says.

“In the U.S. market, Wittke will be able to leverage Leach's well-established brand name,” he says. “Between what these two companies can do and what we have already established in EPG, we can do whatever is necessary to meet the requirements of individual customers.”

Service Fixes and Additions

As they fit the pieces of the new organization together, Federal Signal executives have been discussing equipment expectations with waste industry executives, targeting service. Waste companies want equipment that stays up and running, says Steve Baker, EPG vice president of sales and marketing. They also want rapid access to parts, technical documentation and comprehensive training when equipment is installed. Safety is another industry priority.

“In these ways, the waste industry is similar to our other business lines,” Baker says. “An important difference is that the waste industry is more privatized than municipal sweeping and sewer cleaning and pushes harder for return on investment.”

The Wittke and Leach sales and service capabilities will be integrated with Federal Signal's existing network, which includes 75 licensed dealers that maintain 95 service centers around the country with a collective resource base of 400 factory-trained technicians, 400 service bays and 200 service vehicles.

Service and distribution are among Federal Signal Corp.'s strengths, according to Legg Mason's Baker. “Federal signal has a good reputation for standing behind its products and service,” he says.

The company already has begun to alter the Wittke factory-direct service model to make improvements. “The direct model works in some cases, but not others,” Federal Signal's Steve Baker says. “Through our dealer network, we're bringing product support to the local level, which these guys didn't have before.”

Baker hastens to add that Federal Signal does not plan to do away with Wittke's service infrastructure — it will continue to be employed in the field. Re-tooling Wittke's direct sales and service model should not raise truck prices either.

“None of the modeling we've done bears out [higher prices],” Baker says. “We believe that our dealer network will provide broader and ultimately more cost-effective service coverage.”

In the meantime, Baker hopes to maintain the lion's share of Leach's sales and service dealer network. Federal Signal currently is managing negotiations with Leach dealers and expects to complete the process by year's end. Talks have gone beyond the issue of whether individual dealers will stay in or leave the Leach network. In some cases, Federal Signal is terminating agreements with existing EPG dealers and signing up Leach dealers, Baker says.

Walter Liptak, analyst with Cleveland-based McDonald Investments, says, “Federal Signal dealers are excited about selling garbage products. The combination of Wittke's channel with existing Leach and Federal Signal distributors will help penetrate the market.”

Customers should see fast changes in the way new equipment is delivered and looked after, says Federal Signal's Baker. “Haulers want more and better training when a machine is delivered, and they want access to training throughout the lifecycle of the truck because of high turnover rates (among drivers),” he says. “These are areas where customers will see a rapid change in the Wittke model.”

Baker also believes that a recent corporate parts initiative will boost both Leach and Wittke service capabilities. Called FS Depot, the new service offers Internet-based parts ordering. Dealers, as well as customers, can use the service to order and track parts and warranty claims. They can access technical data and cross-reference information about replacement parts.

“Getting parts to our customers when they need them — via online ordering systems and dealer inventories in the field is a critical component of our total strategy,” Baker says.

Research and Development

In addition to improving customer service, Federal Signal hopes to further the reputation it has built on research and development (R&D) by operating for years in a dozen or more related niche industries.

“They are known for innovation,” McDonald Investments' Liptak says.

For example, R&D receives strong support in Federal Signal's corporate budget. During 2002, the company increased R&D spending by 25 percent from 2001 levels. EPG's R&D 2003 investments are targeted for a 92 percent increase over 2002, Baker says.

This commitment has helped to improve products. For example, Federal Signal's R&D helped to build a sweeper that doesn't rely on water for dust suppression.

“The problem with water is that it freezes during the winter,” Baker explains. “By eliminating the water requirement, northern cities are able to expand their street sweeping season from eight to 12 months.”

The newly acquired Leach test center in Oshkosh, Wis., will boost the Federal Signal fold. The facility already has been working seamlessly with EPG's centralized test lab in Elgin, Ill., to develop new products and technologies. The labs also will help with life cycle testing to improve equipment reliability.

Although Baker declines to share specific research initiatives being considered for waste trucks, he says opportunities for innovation in the major refuse truck categories do exist. “The things we're looking at involve engineering and manufacturing challenges related to reliability, uptime, serviceability, and safety,” he says. “We don't plan to change the product mix, we plan to improve it.”

Looking For More

Federal Signal has built itself into a $1 billion company by acquiring companies in industries similar to one another. “Our strategy is to grow through adjacencies, rather than getting into businesses where we have no ability to make one plus one equal three,” Ross says.

An “adjacency” strategy suggests that Federal Signal may have other waste industry targets in mind. “We got into the industry to become a major player,” Ross says. “A major player would see that there are a lot of other adjacencies in the solid waste area, whether in roll-offs or compactors or other kinds of equipment.

“But in the short term, we have a lot of work to do integrating what we have,” Ross continues. “We're new to the waste industry and have a lot of learning to do. We're certainly not talking to anyone right now. Longer term, however, our strategy of acquiring in adjacent areas seems to be a perfect fit in the refuse world.”

Analysts believe waste equipment manufacturers will continue to consolidate. “As the large waste companies have consolidated, they want to deal with larger (equipment) suppliers who can provide consistent products,” Liptak says. “So you've seen consolidation in all equipment areas, from hoists to balers to garbage can makers.”

Is Federal Signal likely to play a role in the continuing consolidation of waste equipment businesses?

“Why not,” Liptak says.

Michael Fickes is Waste Age's business editor based in Cockeysville, Md.

Mergers in the Making

Historically, consolidation in the waste equipment industry has lagged behind the rapid consolidation of waste hauling and disposal companies. But this has since changed. Larger companies such as Oshkosh Truck Corp., Oshkosh, Wis., have purchased McNeilus Truck and Manufacturing Co., Dodge Center, Minn., to obtain economies of scale in mixer trucks and equipment, parts, ready-mix batch plants and refuse vehicles.

Since 1996, Oshkosh has pursued strategic acquisitions to enhance its product offerings and diversify its business, according to the company. Oshkosh became the owner of Geesink Norba Group, a leading European manufacturer of refuse collection vehicles, in 2001.

As another example, Heil Environmental, Chattanooga, Tenn., has become the “star performer” for Dover Industries, whose companies Heil Trailer, Rotary Lift, Tipper Tie and DovaTech combined with Heil Environmental to earn 60 percent of their parent company's $203 million in 1999 operational profits. In 2001, Heil Environmental purchased Bayne Machine Works, a hydraulic lift systems manufacturer located in Greenville, S.C. Then in 2000, Heil Trailer purchased Texas-based Kalyn/Siebert, a specialty truck trailer manufacturer to help the company diversify its products in niche markets, according to the company.

Elgin, Ill.-based Dover operates as a holding company through 13 equipment manufacturers in industrial markets. The company also owns Vernon, Ala.-based Marathon Equipment Co., which subsequently has made its own purchases. Most recently, Marathon acquired Reduction Technology Inc., which makes size reduction, horizontal and vertical baling equipment.

Wastequip, a Cleveland, Ohio-based manufacturer of waste handling equipment, was founded in 1989 specifically with the vision to “consolidate the waste equipment industry.” The company has since grown through acquisitions into a $200 million corporation. Among the companies in Wastequip's fold are: Accurate, Consolidated Fabricators, Galbreath, Holt Specialty Equipment, Industrial Refuse Sales, LM, May Fab, May Manufacturing and Rayfo.

— Patti Tom