Exploring COVID-19’s Economic Impact on Waste and Recycling (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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[00:00:25] Liz: Hi everyone, this is Liz Bothwell from Waste360 with Hamzah Mazari, Managing Director of Jefferies. Hamzah is also one of our previous 40under40 Award winners. Welcome and thanks for being on the show today.

[00:00:40] Hamzah Mazari: Thank you for having me.

[00:00:42] Liz: We usually start in the beginning, can you please tell me a bit about your background and how you ended up in finance and focus on our industry?

[00:00:50] Hamzah: Sure. I graduated at Stanford University with a degree in Economics and guarding to public accounting, did my CPA, and then got into banking on the M&A side. I really wanted to specialize in the industry and thought equity research was the best way to do that. Always loved the stock market and decided to join Credit Suisse over a decade ago.

Just by chance, we used to bank Waste Management and they needed an analyst who could cover that space. Waste wasn't my first choice of industry, you don't really think of waste initially when you think of covering an industry, but I raised my hand, got into it and it was a very exciting time back then because Waste Management was doing a hostile takeover of Republic, Republic was buying Allied Waste, so there was a lot of action in this space and got great exposure. Ever since then, I have developed very strong relationships in the space and have been covering the sector for a long time, but just got into it by chance if you will.

[00:02:06] Liz: We're glad you're here and appreciate all you do in covering the market and being such a great advocate for the industry itself. I'm sure you've had a busy few weeks and the market has been more volatile than it has been in ages, can you share anything about the coronavirus and its impact on the market in general? Specifically, how it's affecting public waste industry stats?

[00:02:32] Hamzah: Sure. Whenever there's uncertainty in the marketplace, the stock market assumes the worst. We're about 20% plus off of the peak that we saw in the market and there's probably more downside until the market gets clarity that the virus is contained. What we're seeing in the marketplace is that it's had a very big impact on travel and leisure, you look at the airlines are down 60%, cruise lines are down 70%, car rentals down 60%, so there's a direct impact to travel and leisure as people are being quarantined and not traveling, not eating out, etcetera.

We do think that it's a little too early to say if we're going to go in recession because of this, I think you have to assume that the US consumer [unintelligible 00:03:32] up totally and US consumer spend drops a lot for us to go into a recession, but until this virus is contained, we continue to think the market is going to be very volatile. Over the long term, we do think this could be a buying opportunity if you're very long term because we do think that the virus eventually will get contained, it may take a few months, you look at what happened in China, already cases are going down there.

I think if you look at the waste names and the impact of COVID-19 or coronavirus on the space, we take about 80% of the business, frankly, is unlikely to get impacted, maybe 85%. The reason is that a lot of that business is residential subscription, or small commercial container or large container reoccurring, waste is the last thing that gets cut when things go bad, so container weights maybe a little bit lighter, but we don't think you're going to see service decreases right away, that business is pretty contained.

Where we look to potentially see an impact is more on the special waste side or CND volumes, which tend to be more an on-demand based or project-based. You could see some of that get pushed out, but again, very minimal impact to the waste space relative to other companies out there in the marketplace. Pricing is uncorrelated, we think, to coronavirus, so pricing will continue to be strong in this space. We're not forecasting a US consumer recession, that would impact the space, but again, we don't think that that happens. Any pullback in the waste company is just probably a buying opportunity, we think, at longer-term.

[00:05:28] Liz: Okay. That's some positive that can come out of this, for sure.

[00:05:31] Hamzah: Right.

[00:05:32] Liz: Now, do you think the current environment will, in any way, impact the pace of deals or the M&A pipeline?

[00:05:40] Hamzah: We don't think so, and the reason for that largely is that the private companies, which we think make up about 17 billion in revenue today, a lot of those companies have been wanting to sell ahead of the November 2020 election due to potential changes in tax law. If you look at the last three years under President Trump, there's been an M&A supercycle, Waste Connections, for example, has done more deals in the last three years than they've done in eight years previous.

We think there's another year of very heavy [unintelligible 00:06:18] flow to happen, you have companies like ESL that are on an acquisition spree. Even companies like Republic, which tend to be conservative around M&A have talked about M&A coming in higher than what they've done traditionally. We think it's very much driven by potential election dynamics, and I think when you get into next year, 2021, maybe you see M&A go a little bit, but at the same time right valuations in the waste space are still relatively good, even with the market pullback, so it's a good time for a seller to still try to get that multiple before it starts moving down further.

[00:07:06] Liz: What about recycled commodities?

[00:07:08] Hamzah: Yes. We look at OCC, and as you know we've been in OCC and recycling recession. OCC, Old Corrugated Container is basically 70% of the recycling business or more. Pricing for OCC since the China Green Fence took place in November 2017 went from 200 bucks a ton to 20, below 2009 levels. When you look at February pricing, we've picked up versus January, so we do think that pricing in OCC has bottomed, recycling maybe makes up 78% of sector revenues. However, it comes off at a very high detrimental margin.

When we look at recycling, we're coming off of almost three-years recession, and pricing has now picked up. We do think there's some new paper capacity coming online in the US, specifically containerboard capacity that's probably higher of OCC.

Some of the demand drivers, domestic we are getting better, pricing stacked up, we do think that recycling now becomes either a tailwind or, at worst-case, that neutral to the business as you look over the next year, two years. A lot of these companies have actually taken a very proactive stance and try to reduce contamination at the MRFs, at the same time try to restructure or some other recycling contracts. But that business will become a better business over time, but it has been a bad business over the last three years.

[00:08:47] Liz: Thank you. Do you think waste companies have contingency plans to protect personnel right now?

[00:08:54] Hamzah: I think they do. As a small example, Waste Management has canceled some investor conferences because they've limited overnight travel for employees in order to protect them. That's a small example, but I think that that trickles down to the field level and the operational staff, so I do think that they are taking a very proactive approach around protecting the employee base.

I think that in general, the companies have done a good job in trying to lower employee turnover. A lot of these companies also invested tax reform savings in improving employee facilities, locker rooms, so I do think that the sector does care about the employees a lot and you're beginning to, obviously, see that in terms of how they protect the employees through this very tough time.

[00:09:50] Liz: True. Do you think there's an opportunity for medical waste here?

[00:09:55] Hamzah: It's a great question. We think when you look at the med waste business, you really need to see a vaccine developed for coronavirus. For there to be more medical waste volume, you need to see a lot more people go to hospitals to get tested, but as long as we're in the current environment where people are essentially buying more Lysol wipes and personal hand sanitizer, that as a prevention mechanism is not going to generate more med waste, so it's likely doesn't help until we develop a vaccine for coronavirus and then it could potentially be a tailwind.

It's not a negative for med waste, but we don't think it's going to be a big tailwind until there's a vaccine developed. Also keep in mind some of these med waste contracts are fixed pricing or fixed fee, particularly, around sharps or needles and syringes, so there is a little bit of contract structure to keep in mind in terms of when you think about profitability of the med waste business. If there's a vaccine developed and it results in more med waste, it would be a benefit, but right now, we're not seeing that.

[00:11:13] Liz: Okay, something to watch for sure. It seems that air quality in China has improved since the outbreak of corona. Are there environmental benefits of people not traveling as much and to watch China's decline in factory activity?

[00:11:29] Hamzah: I think that's right. I think if you look at China, frankly, one of the reasons they put the Green Fence in place, which destroyed OCC pricing was, frankly, that they wanted to shut down smaller paper mills that pollute a lot, we do think some of that was environmental driven. Also, to reduce contamination clearly of the material that they were bringing in.

We do think China's air quality is improved, there's a lot more focus on environmental there. We do think that as factory pollution goes down and as people travel less, there is a benefit to the carbon footprint. That is a benefit to the environment, we expect that to continue.

[00:12:23] Liz: What other indicators will you be watching in the short term and the long term?

[00:12:28] Hamzah: I think the key indicator that we'll be watching in the short-term is the March data around personal consumption. When you look at March, if the US consumer hasn't frozen up as much as people think, then we'll think that the coronavirus impact on the US consumer is maybe overblown by the market. That's the key indicator that we're going to watch, we do think some of the PMI and IFM data around US industrial production, we'll watch that data but we do already know supply chains have been impacted due to the virus, especially in auto production and some other industries.

Oil and gas we know is already weak and that translates into the US IP number, so I think the expectation that that data will be weak anyway, but I think the real data to watch, that we're looking at it's what happens to the US consumer and monitoring US personal consumption.

[00:13:31] Liz: Thank you, that makes sense. Hamzah, what do waste stocks tell investors about the broader US economy and in the stock market?

[00:13:39] Hamzah: We think that the US waste companies generally are defensive companies, we think that they're not as cyclical as we saw in 2009, we do think that the companies are a very good barometer on a pulse on the US consumer. We think that the commercial residential and large container industrial business, which make up maybe 85% plus of the sector revenues, are very tight to US personal consumption, so it's a very good barometer on what the US economy is doing because 70% of GDP is tied to services, as well as the consumer.

It's not as great an indicator on the US industrial cycle, because manufacturing is only about 10% of revenue. Having said that, we look at special waste volumes, we look at construction volumes, which tend to be more of a leading indicator as to what the economy is going to do, so generally, it's a very good barometer overall on the economy. We do, however, will caveat that and say that this sector is late-cycle, meaning that it does lag by one year going into a recession, so it does tend to be defensive in that nature, but yes, very good indicator bottom line on what the US consumer is doing.

[00:15:06] Liz: I know you've spoken about technology in the past and you see the potential for technology in the industry, can you talk a little bit about that? And How it has changed your view of the industry? Where do you think it could take the industry?

[00:15:20] Hamzah: Sure. When we look at technology, its impacts on the waste sector, we think you may be in the middle innings of that. We published a report a while back where we said if the sector was to get it right, could add 200 basis points to margin, so if margins are 28% today, they could go to 30 because of technology. But the way we think about it is the company has done a good job around back-office, in terms of consolidating call centers and using technology around ERP and Enterprise Resource Planning Systems, etcetera.

Where I think you're still in earlier innings is maybe using autonomous machinery at the landfill. Autonomous trucks are a long way away, we have to get autonomous cars first, but could there be a time where you see an autonomous truck picking up trash at midnight when there's no traffic? Maybe in certain areas. I do think from a machinery standpoint, you're in early innings there.

We do think a lot of the online purchasing of waste is in early innings, we do think that some of the service capability around online is also relatively early innings, so yes, I think from our technology perspective were probably in middle innings. Some companies are a little ahead than others, but generally, we'll say that there's still room for improvement.

[00:16:51] Liz: I remember when we reviewed your 40under40 nomination, Will Flower had raved about, how you have such vision and you understand the big picture so well beyond just the financial side of businesses. What do you think about the industry as a whole, and really what attracted you to it? Considering you probably had a lot of sexy options coming out of Stanford.

[00:17:15] Hamzah: Well, thank you so much. Will is a very kind man, but what I would say is that no, I think what attracted me to this industry and what still does is that it's a very close-knitted industry, and I think once you're in, you're in. There's a lot of people within the industry that are around to mentor you, so I grew up in the industry and had good mentors like Jim O'Connor in the industry who was the CEO of Republic for a while, very close with our current management teams, as well Jim Fish, Don Slager, Ron Jackman and so on.

I viewed this sector very much as a close-knitted family. I also think that the businesses tend to be not very cyclical, they generate a lot of free cash flow through the cycle, there's a lot of M&A potential. Also, I think that over time, this sector has a pricing story as well, so you really have fundamentally everything that you'd like in a good business and you have a very close-knit family-type environment with great mentorship in the space. I'm very lucky to be part of it and look forward to many more years in it.

[00:18:41] Liz: That's great and so true, it's such a great community. Speaking of, what advice would you have for people entering this industry?

[00:18:50] Hamzah: I think the advice I would have is getting early, is I think the best advice that I could give. I do think there's a lot of options within the industry to get in, whether that's finance, whether that's operations. I think you can even get in at the driver level and work yourself up, there's CEOs who been [unintelligible 00:19:13] or been very successful taking that route as well. There's a lot of companies, there's a lot of guys that maybe if you can't get a job at one of the big guys, Waste Republic, Waste Connections, etcetera. There's some new companies up-and-coming like GFL.

At the same time, there's a lot of private companies, you'll see a lot of companies that are private that then sell themselves to a Waste Management to three corporations even, so I would say you get in early whatever route you can use to get in, and if you can't get to one of the big guys, maybe you join a private company and take that route. But I'd say getting in early is best.

[00:20:00] Liz: That's great advice. Speaking of GFL, that's a success story, right? Starting out small and becoming maybe the fourth largest in the industry.

[00:20:11] Hamzah: Right. Yes, we think Patrick has done a great job there, they've grown the business very successfully, now they've done some large transactions in the US market place, they already had a pretty strong Canadian business, and I think the IPO has given them more liquidity and put them on the radar with public investors where I think you could see that business continued to grow pretty fast. We'll continue to keep watching that.

[00:20:45] Liz: That's great. Still, there's a lot of exciting stuff happening even with this blip, this unusual unprecedented blip on the radar, right?

[00:20:55] Hamzah: That's right. I think waste is a defensive place to be right now, and if it continues to trade down with the market, I think one can get a pretty good entry point long term in the name, I know there were a lot of investors sitting on the sidelines saying, "The way stocks are pretty expensive", when were looking earlier this year before the virus hit, so maybe we can get a good entry point in some of these names for investors.

[00:21:25] Liz: Anything else you think we should be paying attention too? Or listeners in the world of waste recycling and organics?

[00:21:31] Hamzah: I think the only thing worth paying attention to is there anything that comes out of the election, if Trump continues, I think it's status quo, but if the Democrats come in, if there anything that they do to corporate tax reform because this sector benefited a lot from US tax rate going down for corporations from 30% percent to 20%. If that changes, that's a very big negative for this space, because this space was the biggest beneficiary of the US tax reform in the S&P 500.

We look at that and are paying attention to that, that's one thing to watch out for. We don't think this will happen in the US, frankly, but in Europe they obviously have something for the new landfill directive that essentially charges taxes on landfills, which is led to a very big uptick in recycling, recycling is maybe half of waste disposals in Europe.

We don't think that ever happens in the US as a [unintelligible 00:22:36] landfill capacity, but to the extent that you see somebody change regulation, we're paying attention to that although, chances are very, very slim there. Those are some of the things outside of technology in the space that we're paying attention to today.

[00:22:55] Liz: Okay, that sounds great. What's next for you with your career? Where you are at Jefferies and what lies ahead for you?

[00:23:03] Hamzah: Yes, we have a big team at Jefferies, I run Business Services Research there, which includes about 33 companies, so we cover other stuff besides the waste space, although we like the waste space a lot as we talked about. I think being a valuable asset to my clients and continue to try to help them in the investor education process, or help them find new opportunities and just be a resource in the space, so continue to add value to my clients long-term.

I think on the corporate side, help my corporates meet the right investors who will help them with fundraising, capital raising, as well as the long-term partners in the business to help grow their business. In general, bottom line, just continue to try to add value in the space and to all my clients is my goal longer term.

[00:24:06] Liz: Good for you, that's great. Well, you're already doing that and we can't wait to watch what else lies ahead for you. I hope you can come to the 40under40 little reunion we're having at WasteExpo, we would love to have you and you to meet all the new award winners who have bright futures like you.

[00:24:26] Hamzah: Great, I wish I was under40 forever, but I appreciate it, I look forward to it.

[00:24:32] Liz: [laughs] We do too. Thanks for taking the time because I know this is such a crazy time for you guys, and watching how everything unfolds with the market, but we really appreciate your insight.

[00:24:42] Hamzah: Great, thank you so much.

[00:24:44] Liz: Okay, talk soon, thank you.

[00:24:46] Hamzah: Talk soon, take care. Bye-bye.

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