JULY 2008

Waste truck and equipment buying slows for C&D markets
Economic Stimulus Package will boost equipment sales
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A sluggish economy is forcing solid waste companies to think twice before embarking on big capital spending programs to buy new trucks and equipment.

One of the truck manufacturers to feel the impact of this hesitation is Navistar International Corp., where truck sales to solid waste companies have slipped.

Autocar LLC, which sells haulers like this one in Chicago, expects a slowdown in purchases through 2008.

“I think there is a general sense of cautiousness on the part of solid waste companies because of what is going on in the broader economy,” says Melissa Gauger, marketing manager at the Warrenville, Illinois-headquartered truck manufacturer.

Navistar does not break down its sales according to how many trucks are sold to different sectors, like solid waste companies or commercial truckers. However in a securities filing in March, Navistar estimates that military and export vehicles made up a third of its total shipments, offsetting weakness in the domestic commercial market.

Across the truck manufacturing industry, sales to solid waste companies were down 25 percent compared to the same quarter last year, Gauger says, adding that most of the decline in roll-off trucks is because of a downturn in the residential construction industry.

“That’s where you’re seeing a lot of the drop off in sales,” she says.

Sales of rear-loaders, side-loaders and front loaders to solid waste companies have fallen a little, Gauger says, but not to the same extent as in the roll-off truck market.

Gauger is predicting that truck sales to solid waste companies are going to remain flat this year with some recovery next year, but not at the level seen in previous years.

The economic stimulus legislation passed by the United States Congress earlier this year might boost sales, Gauger says. The legislation provides a 50 percent depreciation allowance for capital investments this year, in addition to the regular allowance.

“It depends on what operations you’re looking at,” Gauger says. “It’s an incentive for customers to purchase if they are making money.” However, it might not be beneficial for many in the construction industry, for example, she says. If the company is not making money, it is not necessarily going to help by increasing depreciation.

Republic Services, a solid-waste company headquartered in Fort Lauderdale, Florida, plans on benefiting from the extra depreciation allowed for this year.

“We plan to purchase more vehicles to take advantage of the economic stimulus package,” says Will Flower, vice president of communications at Republic Services.

“We will purchase about 10 percent more trucks over last year.”

Republic Services usually purchases about 500 vehicles each year, Flower says, noting that Republic Services has one of the youngest aged fleets in the industry.

The solid waste company, with operations in 21 states, will purchase 550 trucks this year. Republic Services will then decide how many trucks to buy for 2009 during its strategic budget planning process, which takes place in September and October.

One of the biggest issues facing any solid waste company considering the purchase of new trucks or equipment this year are higher prices, Flower says.

“We have seen a huge run up in pricing,” Flower says.

Changing regulations also impacts the decision-making process. Flower says that new diesel engines need to comply with requirements to reduce emissions. New federal emission standards went into effect in 2007 and another round is set for 2010.

“New engines are more expensive and add to the cost,” Flower says.

Evolving technology in diesel engines is stopping Casella Waste Systems Inc. from buying more trucks this year, says Ned Colleta, director of investor relations.

“We are currently buying fewer trucks than in a typical capital cycle because we believe that innovation in hybrid truck technology will rapidly change the truck market,” he says, adding that Casella Waste has made a commitment to deploy hybrid trucks.

Casella Waste, based in Rutland, Virginia, set an aggressive company-wide emission-reduction target of 10 percent over 7 years from 2005 to 2012.

The solid waste company deployed its first hybrid truck this year for an organics recycling route in the Burlington market. Colleta expects the hybrid truck, an International DuraStart Hybrid diesel electric, to reduce fuel consumption by 30 to 40 percent and reduce gas emissions by 65 percent, compared to a normal truck.

“We plan to roll out this technology to additional locations,” Colleta says.

Tom Vatter, vice president of sales and marketing at truck manufacturer Autocar LLC in Hagerstown, Indiana, says he is seeing more companies delay purchases.

“We expect the economy will slow purchases down for the rest of 2008,” Vatter says. “Hopefully, by the beginning of 2009, the economy will improve and companies will continue their 2009 buying plans to get ready for 2010 emission standards.”

Brian Butler, an analyst who covers the solid waste sector for Friedman Billings Ramsey & Co. Inc. in Arlington, Virginia, says truck manufacturers are looking to benefit from some pre-buys in front of the 2010 emission standard change.

Manufacturers of containers for the solid waste industry are feeling the slow down much more than truck manufacturers, Butler says. “Reduced volumes have decreased the need for new containers,” he says “And increased prices due to the higher price of steel is making many haulers focus on repairing old containers and making them last longer.”

Stewart Scharf, an analyst with Standard & Poor’s Corp. in New York, says cost control is the focus of many solid waste companies wanting to continue to generate strong cash flow. This means focusing on repair and maintenance of trucks.

“By keeping trucks in good condition and replacing an aging fleet, solid waste haulers can reduce the frequency of out-of-service vehicles and repair costs.”

This does not mean, however, foregoing new trucks. “With fuel costs skyrocketing, companies are eager to replace old trucks with new more fuel-efficient ones,” he says.