The Art of the (Waste) Deal (Transcript)

[00:00:00] Liz Bothwell: Hi everyone, welcome to Waste360's NothingWasted! Podcast. On every episode, we invite the most interesting people in waste recycling and organics to sit down with us and chat candidly about their thoughts, their work, this unique industry and so much more. Thanks for listening and enjoy this episode.

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[00:00:26] Liz: Hi everyone, this is Liz Bothwell from Waste360 with Jeff Kendall, managing director at Laurel Mountain Partners. Welcome, Jeff, and thanks for being on the show today.

[00:00:35] Jeff Kendall: Yes, good morning.

[00:00:37] Liz: Jeff, please tell us a little bit about your background and how you ended up in our wonderful industry.

[00:00:43] Jeff: I worked with an investment bank in Pittsburgh, a public finance investment bank who I discovered they could finance with tax-exempt on solid waste assets. They first did a very large waste energy facility in Chester, and then Bill developed a landfill outside of Pittsburgh and sold it for a very good profit to mid-American waste back in the late '80s.

Two of the senior partners, Andy Russell, Dawn Ray and myself left and basically started focusing on opportunities on solid waste business, that's how we entered really, coming out of the world of finance. That's how we got started.

[00:01:28] Liz: Great. You've been involved in hundreds of deals across the industry, I'd love to know what your thoughts are on what's different now than say 10 to 20 years ago around deals?

[00:01:41] Jeff: Sure. We did our first consolidation play in the mid-'90s in Chicago, Central and Southern Illinois and acquired companies in Indiana as well. There were just a whole lot more opportunities then than there are today. Multiples were a little lower, but in the mid to late '90s they were pretty high, but lower than today, today it seems to be maybe the highest that I've ever seen in the last 25 years, in terms of just for your typical multiple.

There are fewer deals left today, people are -actually, I think quite smartly- people that are left, a lot of people are looking at selling. But the number of deals I think is the big difference, there were a lot of small haulers and privately-owned landfills back than when we first started. You'd be hard-pressed to find very good independently owned landfill around the major city, few and far between aside from being owned by some of the larger independent restaurant by the public.

[00:02:57] Liz: You do feel like some of the smaller ones are more open to deals now than say they were back when you first started?

[00:03:04] Jeff: Well, no, I think there were a lot more, so you could definitely find people in those days. I just think actually today because the multiples are so high, that's why you're seeing a continued robust acquisition by, particularly, the big guys, because the prices are so high, you have a good cap game rate. If you're thinking about selling, now is definitely the time to do it.

[00:03:36] Liz: Yes, that makes sense. How do you evaluate companies nowadays? I'm sure listeners on both sides of the deal equation would love to hear your thoughts.

[00:03:45] Jeff: Well, the way we look at it, we often in times -like we are right now- we're just looking around for something to do. We sold our last consolidation play to Waste Connections in April and we're looking around. Often times we hear about development deals that are sort of near the end and need a final push over the finish line, maybe someone who can bring the very skills we have to help finish. I actually have a meeting later today with a group of that sort.

A lot of times people call us, we evaluate that particular opportunity. We usually like to find where there's multiple things to do in the area, so we're not looking to really just buy one company, we're looking to say, "Okay, what are the opportunities to build something special interesting in a market area?" We have one asset in Telluride, Colorado and another in Charleston, South Carolina, so we're much more concentrated when we do begin to build a business.

There are a lot of aspects of what you'd buy relative to the price you pay, the quality of the asset, the opportunity to improve. I could give you a long list of considerations, but they wouldn't be that different in terms of how we would look for a business than a typical experienced buyer.

[00:05:39] Liz: Do you think the strong economy has accelerated growth in companies of all sizes and in the different sectors in the waste industry?

[00:05:48] Jeff: Yes, no question. The industry is probably in better shape than it's ever been, best that I can tell because we've been involved in since the late '80s. The big guys are pushing price and really working hard on their margins, they all have very good margins and they're all run by -it terms of the big publics- by very sober and experienced people, so you don't have any of the craziness of the '90s and '80s where a lot of companies were forced to redo their books based upon their flawed accounting.

The flaw and acquisition strategies become a much more solid now, that trickles down to small guys like us. We begin to focus and have the opportunity to focus on things like increasing our margins, raising our prices. The rising tide does lifts all boats. I would say the only turn about today from an acquisition standpoint would be that people, firms that have a large [unintelligible 00:06:58] in the roll-offs side of things, they tend to have done very well because of the growth.

You look at a lot of high-growth cities, like Austin and Nashville, and others they have some very strong roll-off companies because of the growth that has been so great. But they would be scary acquisitions at any kind of high price because their revenues could drop dramatically with a recession or with an overbuilding in a market, and it's definitely going to happen at some point.

[00:07:34] Liz: What advice do you wish all business owners knew? What do you think their top priority should be in growing their business?

[00:07:42] Jeff: Well, I think that they should start out with safety. We've acquired, let's say, 125 companies or more, and not one of these small companies had a good safety program, it's amazing to me. I would focus -and we always do- is focus first on safety. There are a good set of reasons to do that, one is obviously the human reason and to make sure people go home in the same condition that they arrived to work.

It's a tough job, it's a dangerous job. If you ever have just gotten in and out of a truck, I'm amazed we don't get more sprained ankles where it's a hop to get out of the cab. If you're doing rear load work and you're shoving containers around, if you're picking up residential garbage and throwing it. It's just a tough job, so being focused on safety for the right reasons is a very, very good thing.

It has value in terms of, if you are safe, you're going to treat your equipment better, you're going to have less cost relative to injuries and accidents. It has an effect that goes beyond just taking care of your folks, but if you start there and you focus on your people, and you take care of them, you make sure they're using good practices in their daily work, that would be the first thing I'd focus on.

The second thing I think would be on equipment maintenance, preventive maintenance and making sure you have good equipment on the road. If you're in the collection business, you don't want to worry about whether your trucks are going to run, you want to worry about whether you're servicing their equipment. Old friend of mine, Derek [unintelligible 00:09:45] who had owned Evergreen Scavenger for four years until we bought him out in '97,

He had what looked like a shabby situation in Evergreen Park in South Chicago in terms of his site, but his trucks were all perfect. He taught me that motto and we've tried to stick with it and always have good equipment, maintain it well, service it well and helps, obviously, with customer service and helps with safety as well. I could give you a list, how far you want me to go down the list?

[laughter]

[00:10:27] Liz: Those two were pretty good. I wonder as well the value side of the proposition, they should really tell the service side of their business over their pricing because it does become a commodity business? What are your thoughts on that?

[00:10:48] Jeff: Well, I think they need to focus not just on safety but making money because you can't be sustainable if you don't have a good margin and you don't have cash flow to repair your equipment, to pay your folks. You shouldn't get in business and try to run a business on its end margin, it's not sustainable.

I would say anything under 20% begins to get to be unsustainable in terms of an EBITDA margin. You need the free cash flow, you may have some debt, you've got to pay your people well, you've got to repair your equipment. I'm being repetitive and I apologize. Your customer service is extremely important, it's basic but you also have to charge. A lot of times people are fearful about raising their prices for losing a client to a competitor, but you can do an analysis and it's not that hard to do, and goes something like this, if you raise your prices 10%, lose 20% of your clients and you're more profitable.

People need to demand to get paid for the services they're providing, these are difficult services, they're important and they're expensive in terms of the equipment and manpower, so they cannot be shy about charging for the service.

[00:12:21] Liz: Right, that makes sense. It looks like you've been very involved in operations and financing side of land sales as well, have you run into any not-in-my-backyard type of resistance or any similar political issues along the way?

[00:12:36] Jeff: We developed a large landfill in Eastern Ohio Apex still out there. We built a rail trans-loading facility in South Kearny, New Jersey, bought all the equipment, and rail cars and all that sort of thing. Actually developed into what still exists today, is a unit train that goes from Kearney Norfolk Southern to Apex landfill every day. It's 5,000 times a day, our own train back and forth every day.

We also at the same time developed a C&D landfills through north of Apex that took rail in C&D from a variety of places in New York. When you bring in construction demolition waste, you get a lot of wallboards, it gets crunched down and then when combined with oxygen and water it can produce hydrogen sulfide smell.

It's just C&D landfill and we had some similar experiences over at the MSW landfill, but I think it's more extreme than the C&D where we would carefully cover it every day that would then contain the smell, so we didn't really have smell issues. At one point we were doing some construction of a new cell, we peeled off a layer of dirt, we had a lot of smell, neighbors complained, we immediately shut the landfill down, recovered it, eliminated the smell.

The neighbors used that as an opportunity to cry wolf to the head of the DEP and the governor and they continually lied, we actually would run around with measuring devices that would be right next to somebody's house while they were calling the DEP complaining and we would show no smell. We cured the problem, but their continual complaints, and the DEP or the high DEP didn't really like us really garbaging that much. Anyhow, they continued to restrict what we could do at the point where we really weren't making any money, so we actually finally just shut the landfill down and closed, it which was an expensive process.

But it was very unfair, I used to always think that work hard, do the right thing and everything will be fine, but I learned the other lesson is that you cannot fight City Hall, and when you had a very liberal head of the high OPA, EPA, essentially accepting complaints that were absolute baloney, that it can be very dangerous. You don't want to get your neighbors upset and if you do, you want to solve it right away. We should have probably bought a few neighbors out in hindsight and could have just gotten rid of them, because they were untruthful. But anyhow, it was a lesson learned and once things get riled up in an area around a landfill, it's hard to calm them down.

[00:15:38] Liz: Right, I've heard that and understand that, moving in all of our community, it sounds like you did the ultimate thing that you could do at that point, your hands were tied.

[00:15:49] Jeff: Yes, it wasn't fair, it wasn't reasonable but life moves on. We did learn a lesson and that is, as I say, don't let people get riled up and if they do, solve it right away. We always try to do that and sometimes even, as we did there, we solved it but even that can be not enough. Yes, we've run into this, we've run into political issues.

[00:16:20] Liz: [laughs] I'm sure you've seen a lot. I read that when you were CEO of Liberty Waste and Liberty Tire you successfully operated and sold around 100 companies. That's astounding, Jeff, could you dive a little bit deeper into that experience? And a side note to that, the tire recycling is it still as booming as it was a couple of years ago? I'd love to hear your thoughts.

[00:16:45] Jeff: Sure. We've done roughly a half a dozen -what I call- consolidation plays, and they all started out as an opportunity with no particular end game in sight. What we call now Liberty Waste One, we had a PNC as our equity partner, Comerica who has always been our senior lender, is our banker and we acquired, let's say, some 25 companies around Chicago and other parts of Illinois and Indiana. We were raising private equity to expand and we were pretty much done when Rich De Young of American Disposals, a small public company at the time, made us an offer to buy that was something we couldn't refuse. Ultimately Allied closed that deal because they bought American first. We were really never planning on selling, we were building a company, we were excited about it but we recognize that sometimes you can move on and go to other locals.

Liberty Two was actually a joint venture with the Waste Industries where they provided sub-debt. We borrowed money from Comerica, built companies and acquired developed landfills hauling companies, transfer stations in Tennessee and Mississippi with the idea that Lonnie Waste Industries would buy us out at some point, but before we got to that point, Lonnie -that's interesting- in 2001 called and said, "Hey, could use this money back?", so we put the company up for sale prior to when we wanted to to get him his money back and we sold it to Waste Connections, that's when they came this Liberty.

Liberty Three evolved into Liberty Tire, it's a long story short. With Liberty Tire we first acquired a couple of companies in the scrub tire business in North Carolina, great companies.

We really were suspicious about being in the industry, generally has been a lot of fall out in the '90s, but what happened in the '90s is people left when they got into the 2000 actually were the survivors and had pretty decent businesses, some of them dominated. We started basically consolidating that industry with about 40% of North America's scrub tire recycling capacity and collection. We did about 140 million tires and they still do a year, about 500,000 tires a day.

Now the recycling business is good, the company is doing well, it's under great leadership and the industry is fine. It's a very hard business compared to garbage, you just have a lot of moving parts creating a lot of different products to move the rubber. You get 20,000 tires in every day, you've got to deal with those 20,000 tires, you've got to process them. 20,000 tires is a big pile in a hurry, and where people been unsuccessful is either, didn't deal with the tires coming in or they shredded, made big piles and couldn't get rid of the product going out the door. You have to meet markets, you have to evaluate it.

With Liberty, we had a very robust operations planning, so we could decide, you know, connected with sales, "What are we going to sell? What do we think we're going to sell? What should we make? Etcetera". It's a complex business, much more complex than you might think, but it was a lot of fun as well.

Our fourth project was the rail project I mentioned in our last consolidation play, was one in Omaha and Indiana- I'm sorry, Illinois, Iowa and Nebraska. It was pretty typical of what we've done, landfill hauling companies, transfer stations, and Waste Connections bought that in April. That long-winded answer, accurately [crosstalk] answer your question.

[00:20:52] Liz: No, that's great. Did you ever successfully donate the recycled tires to Heinz Field? Or did they decided not to take you up on that?

[00:21:01] Jeff: Well, it's quite ironic because my brother in law [unintelligible 00:21:03] and every Thanksgiving we have a big family get-together and I would say to him, "When are you going to get rid of this turf and go to our official turf?" And I'll never forget the Miami game prior to Thanksgiving, was raining like crazy and the punter hit upon and it stuck in the ground in the wet turf [crosstalk] he always insisted-

If you've seen him, "Okay, I got him this year", but he always insisted that the players and the coaches prefer natural turf so I finally gave up. Move on to other things.

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[00:21:47] Liz: There you go. You might have that little clip on repeat every holiday, I don't know [laughs].

[00:21:53] Jeff: It got too repetitive, too many years and I just gave up. He knew the pitch.

[00:22:02] Liz: He knew the deal, yes. You never know, he might come to you one day.

[00:22:07] Jeff: Right.

[00:22:08] Liz: I read an older interview with your partner Andy Russell, and he described a deal that you did with a hauler in Chicago and this may have been the one you were referring to that you did initially. He mentioned how you said it was an easy deal but he expanded on it to say that it wasn't an easy deal, you had to call the hauler every day and you became like a son to him. It wasn't necessarily easy to everyone else, especially since Waste Management tried to buy that company for 40 years, but he said that you just had the energy and the compassion to get it done. With this industry being so tight-knit, do you think that that special personal touch that you have is part of what makes you successful in this business?

[00:22:51] Jeff: Well, I think if you look it all, the guys who do a lot of acquisitions, you got Rick Wojahn at Waste Connections, Dave Call, Brian Bills, these guys have been around, they'd all tell you the same thing, that it's very important to start with a personal connection. I tend to really like the people that I bought because I totally relate to how they've come up from their bootstraps typically, they've started something, they built it for a lot of years, just really appreciate what they've done. I'm sure that comes through.

Because they've been successful typically, they usually have a lot going for them in the way of personality and other special skills. It's fun to be around them, it's fun to get to know them, I always try to work well with folks and I never try to get the last scrap on the table in a deal. I always tell the folks that when we want to reach a letter of intent, now we're going to try to get the deal done. Tell them at that point we're actually now partners because we're trying to get from here to the end and we both have the same objective, and we're going to run into some things between here and the end that we're going to have to bob and weave to deal with, and we have to treat each other fairly.

I actually never feel I ever really need a contract. Obviously we have them, but we have almost never gone back after a deal and passed for anything or had any clients submit. I cannot count on what part of the hand the number time that's occurred in over a hundred deals. It's been fun and persistence is obviously an important ingredient in any attempt to be successful. I already tell my kids -who are now old, but I always told them, " 'No', is an invitation to begin the discussion". If you take no for an answer, you're not going to get very far.

Just staying with it, getting to know folks, enjoying them, being fair, I think that's an ingredient that all successful acquisitions guys have. I just cut a deal and sold to Waste Connection to Rick Wojahn and Jim Little, we did it over a glass of wine in about a half an hour. It goes to our long-term relationship, friendship and trust. I think that's helpful.

[00:25:38] Liz: Definitely. Well, that's fantastic, I love to hear that. How do you think technology has affected the industry from your perspective?

[00:25:46] Jeff: Well, I think it's provided better information managed with for one, the understanding your productivity -things of that sort- better. Obviously, the ability to track trucks, build more efficient routing, has been helpful to productivity. Obviously keeping track of your maintenance, preventative maintenance, repair and replacing parts and things of that sort it's a simple thing, but it's helpful.

There are developing a lot of technologies and software to help be more efficient. Our software company's Dumpster Market provides online ordering systems for folks. When we got started, only Wasted Management and Republic could take orders online 24/7, now we have dozens and dozens of companies that we provided this online ordering system too.

Instead of- if you see a typical roll-off company they would say, "Email or call us" on their website. Now, you go to people who use our website capability that we provide them, you can go on an order 24/7, put your credit card up, sing terms-- It's a little pitch for us but it's typical out there, just a lot of things developing to help companies be more efficient.

[00:27:15] Liz: Definitely, and being customer-focused. We're all getting accustomed to ordering when we want and where we want, so you're definitely accommodating that.

[00:27:26] Jeff: Absolutely.

[00:27:26] Liz: You mentioned that you feel the waste industry is stronger than it's been since you started. Do you think it'll continue? Or do you feel headwinds are coming and changes are in the horizon?

[00:27:38] Jeff: I think the future industry is very bright. The industries stood the headwinds of the downturn and the recycling and hasn't skipped a beat. The big companies are very disciplined and, let's face it, they are the leaders for everybody. They're being disciplined, I think they're paying too much now, more than they'd like to, they know that. That's the market, interest rates where they are, with their multiples where they are, they can pay 10x or something and it's equative.

Most of those guys that have been around, like Ron, I first met Ron at [unintelligible 00:28:24] at [unintelligible 00:28:25] in 93, these guys have been around and they know the [unintelligible 00:28:29], they know multiples go up and down and I'm sure they just swallow a little bit hard in what they seem to have to pay today and they look for ways they can improve those operations with synergies, with pricing, with other advantages they can bring. They bring the effective multiple down over time, but they'd certainly much rather buy hauler companies, six times than, eight to 10.

I think that's when there is a recession, rates go up, possible. The multiples will come down, I can't imagine they'll stay where they are forever, but that doesn't reflect the underlying rank in the industry, which is that it's pretty oligarchic, people are making very good margins, they're being much safer, they're led by strong experienced leaders, guys like John Gazel, obviously, Slager, Jim Fish, Ron, these are really great leaders for the industry and they're not crazy, you're not going to see accounting changes.

In the late '80s and '90s, there were so many Waste Management chambers, who knew what their numbers really were. Now, the numbers are solid, you've gone beyond what is reasonable to consider the life of the landfill and advertising airspace, a lot of technical issues they've been resolved. I don't see anything particularly harmful to the industry, I will say that the roll-offs business will suffer the next recession. They had a really good run since '08, but they will suffer a bit and then they'll come back after that.

[00:30:29] Liz: Right. You're right, I think this industry is very good at weathering storms, so they will continue to do so. What advice would you give to young professionals who want to get into this industry?

[00:30:41] Jeff: Well, I think it's a great industry, I think it's something people can learn. I certainly tell my kids that it's best to own business. Could they get in, learn from the big guys, be an employee, get learn skills on the ground and get trained, and then, if I was this person after I did that for five or 10 years, and thought I knew the business, I'd go out try to buy myself my own company.

Starting a hauling company is tough, not impossible. People start roll-off companies all the time, but to go into any major city or even minor city and start a front-end business, commercial business is very hard because most of the big guys in there and pretty much everywhere have their customers under contract, so you're sitting around waiting for those contracts to expire. It's very hard to start a business, but I think if you have the requisite skills and you develop those, you have some knowledge, buying a small business and then growing that, if I was a young person, that's probably what I'd do.

[00:31:55] Liz: That's great advice. What else do you think we should be paying attention to in the world of waste recycling and organics?

[00:32:02] Jeff: I think the solid waste business is the one that it's going to continue to be open to new tech, but it's always tricky to build that. New ideas that help make the industry more efficient, make it safer. I think we're always welcomed by the industry.

[00:32:25] Liz: Definitely. To your point, they always seem to rise above it with the commodity pricing and the China ban and the issues around that, it seems it really breeds innovation and we're starting to see a lot of that happen which is great.

[00:32:40] Jeff: Yes, absolutely.

[00:32:41] Liz: What keeps you busy outside of work? Do you have four children?

[00:32:47] Jeff: Four kids, 25 to 31. They're spread out around the country, so we try to get to see them or get them together at Denver, Louisville, Boston and New York. We don't have grand children yet, so that's something hopefully that'll keep us busy in the near future. We'll travel a bit, play a little golf and do a little gardening, go skiing whatever the season.

I do enjoy working, I do enjoy the industry. I'm not that young anymore but I plan to keep busy in the business and I'm looking for new opportunities all the time. It's just been a lot of fun, just a lot of great folk industry and I look forward to getting involved in more opportunities down the road.

I am a partner in a group with a group to really smart guys from Southwestern Pennsylvania, Nick Stork and Rich Walton, we founded a company called Archaea Energy and it's a landfill gas business, but with some very interesting new twists on the traditional construction of landfill gas operations. These guys are incredibly smart and really hard-working. They're relatively young, I can't remember what it used to be like, but just having a lot of fun working with them and helping to build that company along with our software business, the Dumpster Market. I have two really great projects and companies to work with but I can still see acquiring some solid waste businesses down the road.

[00:34:44] Liz: Good for you. Well, you've really touched every area of solid waste, that's fantastic to hear and I can only imagine how many more stories you must have [laughs].

[00:34:54] Jeff: It could take days.

[laughter]

[00:34:57] Jeff: Yes, that much time.

[00:35:01] Liz: [laughs] Well, thanks, Jeff, this has been fantastic and I really appreciate your sharing your unique perspective with us today. I know our listeners are going to get a lot out of it.

[00:35:10] Jeff: I enjoyed chatting with you too, Liz. Hope you have a great day.

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