Riding A Recession or Rebound?

Kim A. O'Connell

In today's economic roller coaster, the waste industry has the lead seat. Solid waste managers may get launched into a downturn a little early, but they also can better prepare for any economic bumps ahead.

While Wall Street analysts, gazing at the bottom line, try to predict whether this year's economic shortfalls will be short-lived or are just the beginning of a full-blown recession, waste doesn't lie. Even if they're not thrill-seekers by nature, haulers know that what's in their loads is a good indicator of the market as a whole. Because when less waste is being generated, chances are the economy is slowing down.

A Good Barometer

“Most manufacturing or retail operations are buying six months out,” explains Lynn Merrill, director of public services for the city of San Bernardino, Calif. “What's in the dumpster today tells me what's going to happen a year from now. If consumers buy less, there's less stuff in the trash. They spend less on the frivolous stuff and more on the basics, and that manifests itself by what's in the can.”

Interestingly, the solid waste industry ended last year on relatively favorable economic footing, according to a report released in January by Standard & Poor's (S&P), New York. In 2000, consolidation continued to benefit companies through market share gains, improved route density, increased economies of scale and greater integration of collection and disposal services, the firm reported. “Compared with the entire industrial universe,” writes S&P analyst Roman Szuper, “solid waste services' credit risk characteristics overall are favorable, supported by fairly reliable demand … because of the essential nature of the services, above-average profit margins, and relatively strong and predictable cash flows.”

A cyclical economy, however, is one of the factors that could challenge the industry this year, according to S&P. “Challenges include a matured market; a more sophisticated customer expecting better service; rising costs of labor, fuel, and information technology; and cyclicality,” Szuper writes. Furthermore, hazardous and industrial waste service firms are below average regarding their financial stability, due to the “greater unpredictability of their revenues and earning stemming from vulnerability to economic conditions and greater dependence on regulations and enforcement,” Szuper says. “This disparity in creditworthiness is likely to continue.”

With this in mind, is the solid waste industry indeed experiencing an economic slowdown — and, if so, how is the slowdown manifesting itself? But more importantly, how are different corners of the industry handling it?

Downward Spiral Ahead?

Although many companies are afraid to utter the dreaded “R” word — recession — there is general consensus that the waste business is not booming like it was even a year or two ago. “There's sort of a debate within the industry and Wall Street analysts on whether garbage is a cyclical industry or recession-proof,” says Chaz Miller, state programs director for the Environmental Industry Associations, Washington, D.C. “The answer is it's probably both. [Garbage] doesn't have the cycles that recycling has, but it's clearly not recession-proof. Based on the stock market, the economic indicators don't appear to be good.”

According to several sources, this is particularly true of a few key areas, namely in construction and demolition (C&D) debris and in corrugated containers. “Some parts of the industry are more susceptible to economic stress than others, such as if you're doing C&D work. [If] you're in an area where they aren't building new houses, then you're going to have a downturn,” Miller says. “The residential and commercial sectors are more stable. Corrugated box shipments also have dropped off, and that continues to be a good indicator.”

Ellen Harvey agrees. As director of corporate programs for E.L. Harvey & Sons, Westborough, Mass., Harvey monitors how her commercial and industrial waste customers are doing. The firm's client list includes several high-profile companies — including Intel, Cisco, Nortel and others — that are showing signs of an economic slowdown, some having laid off scores of employees.

“They're cutting people, so they have fewer people producing less paper, and fewer people ordering paper, and it's a real ripple effect,” Harvey says. “You're seeing the print shops are not running at full capacity right now. There are a lot of cost-cutting measures at these companies.”

Harvey also has noticed that corrugated containers are bearing the brunt of current economic woes. In the Midwest, for example, car manufacturers are moving fewer vehicles, which means that fewer boxes are required to ship parts. “Boxes are a real barometer for the recycling industry, and box manufacturing really is slow,” she says. “Everything you buy comes in a box. Again, when the economy picks up, the first place you see it is in boxes.”

In Texas, the industry is facing a double whammy — a sluggish economy coupled with inclement weather. In one recent, six-month period, Austin received about 30 inches of rain — enough to put a serious damper on construction jobs.

Bob Gregory, chairman and CEO of Texas Disposal Systems in Austin, says that constant news reports forecasting economic doom and gloom do not help matters. “Our construction and deconstruction industry is seeing a downturn, and we don't know whether it's because of the news or the weather,” he says. “The commercial waste collection is much less affected by the weather, and there has been some slowing. We're paying close attention to that.”

Manufacturers are monitoring the situation as well. Michael Knaub, vice president of sales for Schaefer Systems, Charlotte, N.C., says he has noticed that several purchasing decisions that recently seemed imminent now are on hold. “First of all, we're in a highly competitive business — there still are too many container manufacturers,” he says. “So you step up your marketing activities. We still have to get the garbage and recyclables picked up in a cost-effective manner. We're seeing more and more automation all the time, and you can't automate without containers. In a downturn, you certainly don't roll over.”

Fasten Your Seatbelts

Knaub's can-do spirit reflects the one upside of a slipping economy — competition. When consumer confidence begins to drop, the waste industry would do well to become as efficient as possible while providing the highest quality customer service it can — becoming “lean but not mean.”

“The best way to prepare yourself for bad markets in the recycling business is develop a positive relationship with your end-markets, and one that is meant to be a long-term relationship,” Miller says. “I think service is always paramount. But the industry may have a clearer appreciation than before of the need for service during down times.”

For E.L. Harvey & Sons, this entails understanding customers who are trying to do more with less. “Our customers right now are publicly traded companies and are having huge problems with their stock prices — and you go in there and there's a different environment now,” Harvey says. “If a company was trading at $100 a share six months ago and it's at $30 now, there's tension. You have to realize that when you go there; you have to understand their needs and where they are right now.”

Consequently, Harvey's company takes a well-rounded approach to waste management for its customers — hauling trash, setting up recycling systems, analyzing loads to assess what's being disposed of and what can be recycled, and educating clients. Especially in economic slumps, encouraging recycling is more important than ever, Harvey says.

“The more recycling programs [companies] have, the more they're reducing their waste,” she says. “It's a way they can save money right away.”

Focusing on efficiency in-house also is important for the industry when markets are in decline. According to Bob Gregory, Texas Disposal currently is monitoring and collecting on its bills as quickly as it can, while minimizing new equipment purchases. The company also is paying closer attention to whether containers or other equipment are being used to full capacity, or if they are being used at all.

Double-shifting trucks also helps to maximize fleet efficiency, Gregory says. (Because double-shifting can lead to increased maintenance, however, it works best with 24-hour shops, where maintenance can be performed during the eight hours the truck is off-duty, he adds.)

Gregory encourages companies to take advantage of down periods to take a hard look at their operations and how they can be improved. “As you start slowing down, you start having more time for people to do other things,” he says. “You have time for people to check on parts, supplies, services and vendors, and pinpoint areas where you can get quality service at a lesser cost.”

In Southern California, San Bernardino had the rare opportunity to do this long before the economy started to slow down. While the rest of the country was booming, the city spent most of the past eight years trying to climb out of a depression. In the early 1990s, the city lost two of its major employment centers when both a local rail yard and Norton Air Force Base closed. In the past two years, however, as Los Angeles has become ever more crowded and forced populations to fan out, San Bernardino has been on an economic upswing. Merrill hopes that the momentum will be strong enough to outlast the current market situation.

“You have to invest wisely in your infrastructure before you roll into a recession,” Merrill says. “You have to be as efficient as you can, have the best fuel economy, the best equipment. Look at your operating costs as quickly as you can and get tight on it, and get your people on board with you, so they understand what you're going through. Communicate with them.”

This also is a good time to ramp up the maintenance on your trucks because they'll have to last, Merrill adds. “Lack of maintenance can kill you and literally put you out of business,” he says. “If you're lean and mean coming into a recession, you're going to weather it very well.”

Strapped in for the Ride

Meantime, the waste industry is keeping a close eye on Washington — namely on continued discounts in interest rates and on President George W. Bush's planned tax cuts, which ostensibly would put more cash into consumers' pockets. Generally speaking, the industry also supports current legislation that would provide tax credits for landfill gas utilization projects.

The proposed tax cuts may not be closely related to corporate taxes, Gregory admits. “But with many people in the business working as limited liability companies or as individuals, I think [the cuts] will be very beneficial to cash flow,” he says. “The Bush Administration will be positive for industry and sensitive to the impacts of government regulations.”

Regardless of what happens with the Fed, however, the waste industry will continue to go with the flow, just as it always has done. “We're the first indicator of whether there's a slowdown,” says Ellen Harvey. “Because we pay attention to these indicators, we were ready for this — more so than the businesses themselves.”

“This industry allows you to have a window across all types of businesses,” Gregory echoes. He adds that the waste industry has been fairly stable over the years and that it will very likely weather whatever bumps lie in the road ahead.

“We're very fortunate to have a good base, and we've not had to have layoffs,” he says. “We went into business in 1977 and we've had the opportunity to learn from various recessions since then. You learn to make lemonade out of lemons in good times and bad. Bad times make you sharpen your pencil.”

Schaefer's Knaub concurs. “You always have tough times,” he says. “The strong survive, and we will. We're off to a good start this year.”

Maybe this magazine has a role to play as well. “If we could get the press to stop telling everyone it's a disaster out there,” Knaub says, “then we'll be fine.”

Kim A. O'Connell is a contributing editor based in Arlington, Va. For more information on market trends, visit www.wasteage.com.