Solid waste sector poised for growth
by Brian R. Hook

As waste collection volumes continue to track the overall growth of the economy, solid-waste companies are shunning the big mergers and acquisitions of the past and focusing more on operations and even some divestitures to boost bottom lines.

Waste Connections Inc., with operations in 23 states, is looking to expand by both organic growth and smaller acquisitions. Worthing Jackman, chief financial officer of the Folsom, California-based company, said Waste Connections typically looks to acquire private solid-waste operations. He described most of the buying as “tuck-in acquisitions.”

The potential acquisitions tend to record anywhere from $500,000 to $1.5 million in revenues a year. He said that Waste Connections sometimes acquires operations with between $10 million to $25 million in annual revenues. These companies tend to have franchise or exclusivity agreements and provide 100 percent of the service in a defined territory. These types of solid-waste operations are usually located on the West Coast.

“Organic growth has been accelerating. We’re getting big enough that organic growth is providing about the same amount of top-line growth as acquisition growth,” Jackman said. Waste Connections reported revenues of $721.9 million in 2005 up from $624.5 million in 2004. Net income increased to $83.9 from $72.3 million in 2004.

Waste Connection expects revenues to range between $795 million and $805 million this year. Waste Connections targets secondary and suburban markets that have strong demographic growth trends and where competitive barriers to entry can be developed. Most of its operations are currently on the West Coast and in the South.

“Our belief is that this is a local business. Every local market has different characteristics,” Jackman said. Waste Connections plans to spend $90 million on capital expenditures throughout this year. “We focus on a decentralized operating structure where we empower our local management team to run the business,” Jackman said.

Volume growth across the waste sector continues to track the gross domestic product at most solid-waste companies, said John Skinner, executive director and chief executive officer of the Solid Waste Association of North America. The trade association for the solid-waste industry is based in Silver Spring, Maryland. Skinner said that regional developments give some solid-waste companies more volume growth.

“If there is a population influx into an area, then your volumes are going to increase greater than the average across the country,” Skinner said. Other factors helping to determine volumes include new home construction, which impacts construction and demolition debris waste. Hurricanes and other natural disasters also affect volumes.

The National Association for Business Economics is predicting real GDP growth of 4.5 percent in the first quarter of this year. The NABE expects the economy to shake off the effects of last year’s hurricanes and surging oil prices. For all of 2006, the association for economists in Washington D.C. expects GDP growth of 3.3 percent.

Skinner said he does not expect to see any major mergers or acquisitions. He said that he was told that there is $2 billion worth of acquisitions that are being considered by the major solid-waste companies. “But they are selective and just adding on,” he said.

“The other thing that you’re seeing is the larger companies are willing to divest themselves of accounts that are not returning what they would like to see,” Skinner said. “That’s going to create some opportunities for your smaller companies to fill in.”

Waste Management Inc. announced plans to divest under-performing or non-strategic operations representing over $500 million in annual revenues. “These operations consist primarily of collection businesses and transfer stations,” said Lynn Brown, vice president of corporate communications at the Houston-based solid-waste company.

“Improving the quality of our assets has been one of our top priorities. We have been studying our under-performing business operations with the objective to either fix or sell them,” Brown said. The reviews were based on a number of financial and operation criteria and how the operating units fit into the company’s business model, she said.

“We will also be looking for opportunities to reinvest the divestiture proceeds to grow our business in areas with higher markets,” Brown said. “We do make acquisitions from time to time to improve our efficiencies – usually in the collection area.”

Waste Management, which is the largest solid-waste company with operations across the country, reported revenues of $13 billion in 2005 compared to $12.5 billion in 2004. Net income increased to $1.2 billion from $939 million during 2004. It expects to see continued growth in 2006 and is planning $1.45 billion in capital expenditures.

Stewart Scharf, an equity analyst Standard & Poor’s Equity Research Services in New York, said most of the solid-waste companies that he tracks are focusing on pricing. He said the companies are using hedging programs to offset rising fuel costs. The companies are also adding fuel surcharges. “Some are willing to sacrifice market share in a certain region if it means that they can raise the price a little bit more,” he said.

Scharf said Republic Service Inc. is a bit of a standout in the solid-waste sector when it comes to pricing. “They’ve been able to implement more pricing initiatives, generally improving their overall margins and generating a lot free cash flow,” he said.

Fort Lauderdale, Florida-based Republic Services is still looking for operations to acquire, according to Will Flower, vice president of communications at the company. “However, if seller expectations are too high or if a company does not fit our very disciplined business model, we simply choose not to do the acquisition,” he said.

Flower said the company’s acquisitions started to slow in 2000 and 2001. “We really focused on letting the dust settle and started to derive value from the companies that we had purchased over the last several years,” Flower said. Revenues at Republic Services for 2005 totaled $2.8 billion compared to $2.7 billion in 2004. Net income totaled $253.7 million compared to $237.9 million in 2004. The company is targeting internal growth this year of 5 percent. It is also planning on spending $315 million on capital expenditures.

Allied Waste Industries Inc., which recently announced plans to move its corporate headquarters to Phoenix from its current location in North Scottsdale, Arizona, expects to spend $700 million on capital expenditures this year. It is the second largest waste-management company after Waste Management. It has operations in 37 states.

Revenues at Allied Waste totaled $5.7 billion in 2005, up from $5.5 billion in 2004. Net income increased to $151.8 million compared to $27.7 million in 2004.