Tuesday, July 25, 2017

Competition is Keen in Garbage

The last couple of articles, “Advanced Disposal Services:  Hauling a Heavy Load” and “Solid Play in Solid Waste” looked at waste management services.  The group has exploited increased demand and market fragmentation to deliver strong profits and growth.  Investors have flocked to the sector, inspired by one acquisition announcement after another. There may be more afoot in the sector than consolidation. 
There are some newcomers to the solid waste management sector that have passed up the usual business model of garbage trucks, transfer stations and landfills. These potential disruptors are rethinking solid waste and bringing new technologies to the sector.

Image result for recology waste zero imageRecology (formerly Nocal Waste) is a self-described integrated resource recovery company.  It has made ‘zero waste’ its business motto or at least that is what its marketing effort claims.  Recology provides three colored bins to presort recyclable waste items such as paper, plastics, metals and glass.  The company uses state-of-the-art technology such as optical sorting to further fine-tune its plastics recovery.  Organic wastes are used for compost production, which has been tweaked with modern composting practices.  An Aerated Static Pile system is used to cut down on handling costs, reduce odors and speed time to finished compost.  
The company has also teamed up with G2 Energy, a waste-to-energy power generator, to tap methane in at least one of its landfills in Vacaville, California.  G2 Energy purchases the methane from landfill owners, converts it to electricity with its own biogas plant and then sells the electricity to the grid.  The arrangement allows Recology to earn incremental fees even from waste that has not been successfully diverted from the landfill.
The company has expanded from its home base in northern California to Oregon, Washington and Nevada.  Besides collections fees from residential and commercial customers, the company gets revenue the sale of recycled materials to commodity brokers.
Turning a Dollar on Garbage

Although Recology is a private company it has disclosed revenue figures as recently as 2015, when total sales were near $800 million.  The company is quite transparent in financial results for its Sunset Scavenger and Golden Gate operations in San Francisco, where as a rate order applicant it must comply with activity and financial reporting requirements.  The most recent report for the year ending June 2016, revealed $419.8 million in total sales for this segment, of which 4% was from recycling revenue, 40% was from tipping fees and 56% was from collection fees from commercial and residential customers.  The company handled a total of 909,485 tons of waste in the year, of which 499,636 tons were diverted from landfills.
In 2016, the reported diversion rate in San Francisco was 55%.  Recology claims that for some customers in 2016 it was successful in diverting over 60% of waste collected from landfills.   Still that is well short of the company’s ‘zero waste’ mantra, causing a brown spot on Recology’s green image.  Detractors in the California market in particular have questioned company’s track record and its near-lock on waste collection in San Francisco.  The problem might be at the point of origin as Recology counts on its customers to accurately presort waste into colored bins for recyclables and black bins for ‘other’.  Too much waste is getting shoved into the black bins headed for the landfill. 
In the past Recology’s critics and have also pointed to long distances Recology has transported waste to its landfills.  This increasing the carbon footprint of garbage that was supposed to be diverted from the landfill.  Waste Management (WM:  NYSE) operates a landfill located closer to the San Francisco city center.  Adding to the tensions in California is a 14% rate increase application by Recology to help cover an $11.6 million investment in upgraded sorting and recycling equipment.  The upgrade was necessary to sort out the dramatic increase in shipping boxes and packaging materials related delivery of ecommerce orders of everything from groceries to clothing to appliances.     
Set Apart, Just Like the Rest

Although Recology likes to portray itself as a solid waste player set far apart from the typical garbage collector, its profile is quite similar.  It operates collection trucks that trundle waste off to transfer stations and ultimately to landfills.  Its infrastructure is composed of the same sorting and processing equipment that can be found at any solid waste management company.  All the established players in the solid waste industry have engaged to one extent or another in the same waste recovery and recycling activities as Recology, earning extra revenue on recycled paper, plastic and glass, selling compost and converting landfill methane gas to electricity.  Indeed, Covanta (CVA:  NSYE) has made waste-to-energy it’s a top focus and looks at garbage collection as feedstock sourcing.  Covanta’s landfill in Marion County, Oregon, with its waste-to-energy facility, has been in operation for thirty years.  The recycling rate in that community was over 50% based on collection and diversion activity in 2015.  Likewise Waste Management notes in its marketing and sales materials that “zero landfill” is the ultimate goal and closed-loop solutions are on its menu of services.
Criticism of Recology for not entirely living up to its claims of fulfilling a zero waste goal might be as much driven by consumers who do not want to see their monthly bill go higher as it is of competitive jostling by other garbage haulers.  As can be observed in the Covanta business garbage is feedstock for a commodities recovery and power generation business.  The criticism does not mean that the company’s business model is not working.  It might just reveals that the competition is keen in garbage.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. 

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