Waste Management in the Time of COVID-19
The waste management space isn’t easily interrupted, even by global phenomena such as the COVID-19 pandemic, according to Adrian Peace, former Senior Vice President of Emerging Business Operations for Republic Services. In the following Q&A, he discusses current challenges to the industry, as well as what to expect from it in the coming decade. Following are a few select excerpts from our broader discussion.
What have been the key trends or themes in the waste management industry over the past 6 to 12 months?
The organic growth rate is flat to maybe down a point or two due to what’s happening with respect to COVID. Companies are still figuring it out, but things are starting to settle in now. Industry players have had to reset all their business models to understand this new normal. I think the organic growth rate will return to the 2% to 4% range over the next 12 to 18 months, and we’ll see growth with respect to profit margins and EBITDA because companies are running a lot smarter.
We’ve seen recycling revenues across the industry get compressed because of commodity prices. Fortunately for the industry, companies are well run and have done a great job improving their cost-to-goods-sold perspective. That’s where we’re seeing a more profitable recycling business, but not the top-line growth normally seen. The challenge companies are facing is a spike in contamination in the waste stream. Part of that is people are home more so there’s more waste in their containers. Consequently, some don’t have properly sized recycling containers, so some of the waste from trash gets into the recycling bin. That puts a burden on material recovery facilities (MRFs) to properly sort. Companies are already finding ways to push back some of that contamination.
What is the typical growth and profitability profile of a midmarket waste management company?
Companies thrive in midmarkets. The typical growth rate of the midmarket is generally between 2% and 5% in a normal environment. This tends to be due to longer-term service contracts. I think we’ll see growth rates from an EBITDA standpoint of 4% to 6% year over year, yet revenues will be either flat or slightly down.
Given the focus on health care, what’s the opportunity for waste management in the space?
The medical waste industry is continuing to develop and change, even in the past five years. I live outside of Chicago, and north of the city three companies have popped up in the past three to four months that do COVID testing and treat the flu. These immediate care and testing locations are popping up all over the place. There’s this new proliferation of not just locations such as critical care centers such as hospitals, but all these other satellite locations. As a result, there will be a need and an opportunity for companies to service those markets. There are also more labs today than there were a year ago. There will be a significant amount of fervor and certainly energy around what’s happening with respect to health care in our country. This will motivate companies to investigate this space.
How will the social and regulatory focus on environmentalism be expected to impact growth in the coming years?
First, let’s talk about the regulatory focus. In the waste space, things happen from California and work their way across the rest of the country. Ultimately, it’s going to be an organic play over the next three to five years. The big challenge with that is the content of water. Any time companies try to haul water, costs rise because it’s heavier, driving more waste, fuel, and battery life. What we’re seeing is that companies are not planning necessarily for 2021, but for 2025. That’s when there could be a much more intense regulatory environment. If there is an administration change, clearly there’s going to be more regulation with respect to the organic side of the stream and the capture of methane.
All the companies have environmental, social, and corporate initiatives and things they’re driving from a sustainability standpoint. The social impact of how that’s going to change the business model is unclear. I believe more companies will try to get their carbon footprint down and work on how many tons of CO2 they can pull out of the stream. Those are the avenues they’ll be focused on over the next 5 to 10 years.
What are the key considerations for investors interested in the waste space?
One of the biggest challenges with respect to making investments is understanding regulation, and where regulation is going. A PE firm that wants to enter the space must think about where the space will be 5 to 10 years from now and make investments accordingly. Thinking about environmental considerations, I’d look into solutions around organics and what position I could play with respect to the profit center of the entire cycle of organics, how I can play there to differentiate myself versus just being another player who is jumping into the space.
Landfills can be very profitable if they do extremely well, but there’s a lot of environmental considerations. But there’s opportunity with respect to legislation or better requirements on contamination to ensure that cleaner products get into recycling bins.
How would a potential tax law change under a Biden administration alter the landscape for private equity in this industry?
There’s no doubt that if there is an administration change, there’ll be more environmental regulation than we’ve seen before. I don’t think that we’ll go to a standpoint of regulation where it checks the economy, what we’re seeing from an oil perspective, and what we’re seeing from an exploration perspective. What I do think we’ll see is something that’s middle of the road. What I’ve heard people on both sides of the aisle talk about is more common-sense regulation that can help have an impact on things with respect to climate change. That is where the U.S. and the world is going. With a new administration, those opportunities will be plentiful.
About Adrian Peace
Adrian Peace was most recently the Senior Vice President of Emerging Business Operations for Republic Services in Phoenix, Arizona. While at Republic Services, Adrian led the company’s Recycling Operations, as well as Oil and Gas, Compactor, Solar, and Landfill Gas to Energy businesses. Adrian was also responsible for Republic’s Sustainability initiatives. Adrian joined Republic Services after 3.5 years with Grainger as the Vice President of Specialty Brands, Mergers and Acquisitions, and Brazil Operations. In this role, Adrian was responsible for leading all aspects of Grainger’s stand-alone businesses in the U.S. and Brazil, while developing and implementing an acquisition/integration strategy for the company.
This article is adapted from the October 1, 2020, GLG teleconference “Waste Management and Recycling Opportunities: Private Equity Investing.” If you would like access to this video panel or would like to speak with Adrian Peace, or any of our more than 700,000 experts, contact us.
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