WasteExpo Impressions and Insights

WasteExpo 2016 was held last week in Las Vegas. The mood at the show was very upbeat, reflecting positive industry fundamentals as detailed below. Attendance was high, at roughly 13,000, while the number of exhibitors reached a record, at over 600.

Once again, the education sessions provided a wealth of information on key industry issues and featured a new industry track, Food Recovery Forum, which will be featured in a future column. This month, however, we are focusing on impressions from the show floor and insights gleaned from the Investor Summit.

First Quarter Volume Strength Appears Sustained, Supporting Price Discipline

As noted in last month’s column, first quarter volumes were surprisingly strong across the board, but questions lingered as to how much of that strength was due to pull forward from the second quarter, given the mild winter weather. That was resoundingly answered at WasteExpo, where all players cited continued volume strength into the second quarter and experienced a seasonal ramp up from first quarter levels. Players in the Northeast, who benefitted most from mild first quarter weather, acknowledged some slowing vis-à-vis first quarter, but as a rate of growth, not absolute volume levels. The housing recovery was most frequently cited as the primary, though not the only, source of strength.

Buoyed by volume strength, a robust pricing environment was frequently noted, with surprisingly few exceptions or finger pointing, which is highly unusual in this industry! “Disciplined” was the word most frequently used to describe pricing by both publicly-traded and privately-held industry participants. Ironically, the slow pace of the industry’s volume recovery was cited as a factor in the price strength—it has kept capital expenditures in check, such that container supply out in the field has not kept pace with the recent, more rapidly rising demand, allowing premium pricing on what is available. This is most apparent in temporary roll off, but real strength in permanent roll off was consistently noted as well.

And, there are indications that the good times may continue to roll. Early indicators of a slowdown—a falloff in special waste and construction and demolition volumes—have not yet appeared on the horizon. Additionally, increases in container weights do not appear to have consistently (or much at all) translated into service upgrades, which should indicate another leg up in the offing. There are some margin headwinds to be sure, skilled maintenance and driver shortages, in particular, causing labor cost increases, but in any event, the industry is enjoying the best conditions since 2007.

Recycling May Have Bottomed, But Near-term Upside Seen as Limited

There were various signals that recycled commodities and energy pricing may have bottomed—Covanta Holding (CVA) noted a pickup in metals and natural gas pricing, while RISI has reported modest recycled paper price upticks over the past several months. Several plastic grades are also seemingly off their bottoms. That said, optimism surrounding the recycling business was muted at best, with virtually no one expecting a material rebound over the near to intermediate term, as China demand remains dampened, even as its own domestic supply rises. The U.S. market was considered to be more robust, particularly for old corrugated cardboard (OCC), as the shift to on-line retail sales from bricks and mortar stores seems to be accelerating, as evidenced by retail sales trends in this last quarter in particular, which supports OCC demand. The silver lining in this situation is that continued, relatively low recycled commodity pricing will continue to keep pressure on the haulers and recyclers to move to service-based, or process fee business models, which will more sustainably benefit the industry over the long term. All the participants who spoke at the Investor Summit reiterated their commitment to renegotiating recycling contracts toward a service fee model as well as to improve processing costs and contamination levels. There doesn’t appear to be any good, universal solution to the glass problem yet, however!   

Waste Connections’ Booth the Center of Merger & Acquisition Activity

In light of Waste Connections’ (WCN) commentary that it intends to divest (or preferably swap) a portion of the just-acquired Progressive Waste Solutions (BIN) assets that do not fit its model, as well as its commitment to continue to pursue its traditional tuck-in acquisition strategy, it was hardly surprising that the WCN booth was a hotbed of foot traffic, activity and meetings. With a panoply of acquisitions, divestitures and swaps potentially on the table, there was something for everyone! Historically, WCN has tended to avoid urban markets, so BIN’s New York City (NYC) and Washington, D.C. assets were oft cited probable divestiture candidates; NYC in particular, in light of the recent announcement that BIN had withdrawn its NYC contract proposal. All that said, WCN management made it very clear at the Investor Summit that they were in no hurry, and in fact, intend to spend some time evaluating what they have, what they can fix, and what they may potentially get a higher price for, if they improve the assets. That timeframe is unlikely to extend beyond the fourth quarter of this year, however. With the industry enjoying relatively high valuations (within its historical context) and given the positive fundamental back drop, there is a plethora of interested strategic and private equity players, so there appears to be no shortage of buyers (and hopeful sellers)! A number of observers noted that it was like the 1990’s all over again. It is to be hoped that more reasonable purchase prices, conservative synergy targets and just plain better management skills ensure that the industry does not repeat the very long hangover that followed the 1990s acquisition party…..

Given the current industry valuations, the positive fundamental backdrop and a (hopefully) calmer stock market, it would not be surprising to see Advanced Disposal attempt its initial public offering (IPO) again, which was postponed in the midst of the stock market downturn in February.  

NYC and its Environs Should Be Bubbling In the Next Year

The next year should prove very interesting for NYC and the tri-state area. With BIN having pulled out of the NYC contract, speculation swirled around who would be the replacement, with the betting heavily weighted toward Waste Management (WM) and CVA. On the one hand, CVA would further NYC’s landfill diversion goals, but would also put all the city’s eggs in one basket, given CVA’s previous NYC award. The tri-state area players are also growing, shifting and changing. Private rail haul operator Tunnel Hill Partners acquired Connecticut hauler City Carting just before the show, continuing its rapid expansion pace. Some former members of the management of Southern Waste Systems (SWS), acquired by WM early in the year, have reestablished a foothold in the New York area, purchasing an operation in Long Island. Private hauler Winters Bros., also with operations in Long Island, continues its aggressive expansion plans, while Action Environmental Services remains a major presence in NYC and New Jersey.  If WCN does decide to exit the NYC market, there should be a number of potential buyers, particularly as there is a great deal of private equity dedicated to the Northeast region. 

Leone Young is the Principal of LTY ERC, LLC, providing consulting and research services to, and conducting special projects for, the environmental services industry, primarily the solid waste sector.