The past year has been marked by notable extremes in the waste sector. Healthy revenues, pricing and M&A activity that wrung in 2020 were offset by a COVID-inspired downswing that prompted slowdowns in the commercial sector, increased residential volumes and an uncertain economic forecast.
As we head toward 2021, most public waste companies have reported that revenues, volumes and M&A interest have started to solidify after mid-year lows.
At Waste Today’s 2020 Corporate Growth Conference held Oct. 14, waste industry executives, investors and analysts tried to make sense of recent changes in the industry and laid out expectations for the near future.
Effram Kaplan, managing director for Brown Gibbons Lang & Co., moderated a session titled “Market Dislocation: Where is the Market Post-Coronavirus?” The session covered the near- and long-term impacts of COVID-19 on the environmental services and waste markets.
COVID brings changes
Dovigi noted that COVID has had more of an impact on business in certain regions than in others due to the presence of, and adherence to, stay-at-home orders. He noted that citizens in Canadian markets generally abided by such mandates without much pushback, which allowed for less disruption outside of a 6- or 8-week window in March and April when all but essential businesses were shuttered. Similarly, he noted that U.S. operations experienced significantly different ramifications from the virus based on the state, population density within those states, and how strictly stay-at-home orders and mask wearing were prioritized
Dovigi also stated that business in urban markets was more likely to be affected than those in more rural locales.
“When COVID hit, it was more of a regional dynamic based on how hard-hit the regions were and how drastic the shutdowns were, so I don’t think the [bottom fell out] industry-wide,” Dovigi said. “In urban markets, there was much more of a shift towards residential volumes versus commercial volumes.”
"When COVID hit, it was more of a regional dynamic based on how hard-hit the regions were and how drastic the shutdowns were, so I don’t think the [bottom fell out] industry-wide,” –Pat Dovigi, founder and CEO, GFL Environmental
Dovigi said that the first two months of the pandemic brought about increases in urban market volumes of 10 to 15 percent on the residential side and decreased commercial volumes between 20 and 30 percent. In rural and secondary markets, business was still negatively affected, but the blowback was not as drastic due to more lenient stay-at-home orders and less population density.
As of early Q4, Dovigi said that volumes have normalized a bit, and are up only 2 to 5 percent year over year on the residential side and down between 5 and 10 percent on average on the commercial side because of lingering impacts on restaurants, sporting venues and other businesses.
Dovigi noted that he expects a “rebalancing of the volumes” to occur toward summer 2021 as people return to more of a normal routine with work and commercial spending.
Cappadona followed up on Dovigi’s comments to say that Veolia’s operations fared differently at the onset of the pandemic not only based on location, but also between different lines of business.
“As companies moved to a work-from-home [blueprint], we immediately saw an uptick in business and people prepared for vacating their facilities,” he said. “In the April and May timeframe, we were dealing with decontamination work that we were doing for some of our core customers and preparing these customers so they could go back to a work from the office scenario, and we were also dealing with some geographic issues.
“We saw a major impact in the New York/Tri-State area, while at that time, other parts of the country were continuing to operate as they always had. And now we’ve seen a shift of that as we’ve gone through the summer and into the fall. At the end of the day, our business mix changed dramatically over time, but we remained busy throughout. But the type of work we were doing and the type of customer we were serving may have shifted a bit over time.”
Cappadona noted that Veolia works for a number of companies and universities involved in pharmaceutical research, which is one segment that has been working around the clock and has required a pickup in service intervals. Conversely, the company’s municipal accounts were hit hard and its general manufacturing market customer volumes have been inconsistent.
“How does that wind up impacting the different businesses we’re associated with? The markets we can predict that are going to be up include pharmaceuticals, biotech, research—we’ll continue to see activity there,” he said. “Some of the other business segments are going to be a little bit more unpredictable such as in general manufacturing. Oil and gas has been relegated to a new norm with the stabilization of the price of oil to this point, but heading into the winter, our focus is going to be being nimble enough to adjust to the market.”
He says that the ability of Veolia’s workers to adjust on the fly to meet the needs of its customers has been pivotal in the company’s performance during the last half year.
“They were scared to death of getting sick and scared to death of losing their jobs, and we worked to make sure they were comfortable [on both those accounts] immediately to ensure the sustainability of what we do every day,” he said. “And our group responded outstandingly to the challenge to put us in a good position to take advantage of the opportunities ahead that we have.”
Stanton said that Harsco was forced to shift gears coming into the year as it went from riding a wave of healthy business to having to suddenly face upheaval among its customer base.
“It feels like it was 10 years ago, but Q1 was a very robust quarter, and if you focus on retail, commercial and healthcare, it might have even been record-setting in terms of performance, but it was certainly one of our peak quarters in the history of our businesses,” he said. “Then we hit Q2 and experienced those massive shutdowns. But doing some more prognostication, I think some of the top retailers you saw in 2019 versus where they are going to be in 2021, you’re going to see some massive shifts, and the big one is going to be from big box to online retailers.”
He said that the shift to e-commerce in the retail space may have accelerated trends by 5 to 10 years, as this sector grew 20 percent in a quarter’s time.
“The adoption rate went through the roof [with e-commerce], and it’s never going back to what it was,” he said. “It might become adjusted [downward when COVID slows], but it is never going back to where it was. So, we do see and are projecting a shift away from just having the box retailers to [there being a bigger focus on] distribution and logistics management of retail materials, which will be a growing business for us.”
Stanton said that the gap between the Amazons of the world and the brick-and-mortar retail customers is going to widen, while bankruptcies and shutdowns might become more commonplace for retailers.
Overall, Stanton noted that although businesses slowly started to come back in Q3, the company’s volumes have been hit-or-miss depending on location, with some markets seeing booming activity while others struggle to build back to normal. He added that Harsco is working to bridge communication gaps with its customers to provide better service that aligns with changing needs.
“I think this is going to be a really long road back, and we’re going to have to stay close to our customers, talk and communicate with them a lot, make sure we’re meeting their needs and understand where they’re going so these adjustments that are going to happen are things we are prepared for,” he said.
M&A activity in the waste and environmental services markets continued at a torrid pace going into the year. When COVID hit, it caused many companies to slow, but not halt, their appetites for activity.
“On March 13, we hit a very quick pause and had to consider what the impact was going to be to the market. At the time, I thought [the fallout of the pandemic would be [measured in] weeks, and it’s been months,” Cappadona said. “I think a year, a year and a half [is when we’ll be completely back to normal], but I do see Veolia’s trajectory the same. Where we were pre-COVID hasn’t changed in terms of our investment in North America. We continue to develop our assets and look at opportunities that fit well in terms of technology, in terms of geography, for Veolia going forward. You’ll see us do things before the end of the year. You’ll see us be focused going into 2021, and we have a positive outlook here in North America.”
Cappadona said that the company is keeping on its trajectory of measured M&A and is assessing opportunities as they come about. Although the economic downturn has caused potential complications in terms of pulling deals through for some, he notes that it may help fast-track deals in the future for business owners looking to sell.
“Maybe there have been some opportunities that have been created because of a result of the stress that some companies have been under over the last few months that may create [openings where we’d be able to do a deal now] that maybe we wouldn’t have otherwise,” he said.
Stanton said that Harsco anticipates completing some smaller tuck-in acquisitions related to its recent ESOL and Clean Earth deals, but there are also bigger moves that may be in store for the company to help it transition into a “single-thesis environmental services company.”
“More ambitiously as you’ll hear from Harsco, there are still strategic opportunities to make bigger moves in the environmental services direction,” he said. “Those are going to be big moves, carefully contemplated and timed with our strategic desires, and somewhat, market cooperation.”
Dovigi said that going into 2021, GFL will be primarily focused on integrating assets from its WCA acquisition and those divestiture assets from the Waste Management/Advanced Disposal deal, but that the company’s ample experience with asset integration will position it to be aggressive in short order if the right deal were to come along.
“The first three to four months are going to be solely focused on executing on the integration plan that we have [for the Waste Management/Advanced Disposal divestiture and WCA deals], but assuming that goes the way we think it will, … we’ll get back to our regularly scheduled programming [in terms of looking at M&A] like we have over the last 13 to 14 years,” he said.
Panelists in another Corporate Growth Conference session titled “The State of Mergers & Acquisitions” shared similar sentiments regarding slowed activity during Q2, but noted that there appears to be ample opportunity for those looking to buy or sell a waste business as 2020 comes to a close.
Charles Appleby, founder of Advanced Disposal Services, said that now is the right time for those looking to make a deal.
“We believe that [the impacts of] COVID-19 will be short-lived—maybe longer than we expected it to be, but I think it would be a mistake to take your foot off the accelerator if that’s what you’re doing because I think now is a good time to be looking at the right opportunities and to take advantage of them,” he said.
Joe Cassin, vice president of business development at Waste Management, said that although there have been some slowdowns to activity, Waste Management is moving forward and looking at what deals the company might be able to capitalize on.
“I think the time is right to continue the [M&A] momentum going forward,” Cassin said. “I will say regarding deal flow, it’s not as robust as it was last year in 2019, but we’ve closed half a dozen transactions this year and have several more lined up that will close before the end of the year, and I’m sure several new ones that will go into the first quarter of 2021.”
Business dealings don’t happen in a vacuum, which is why forecasting the economic conditions of 2021 is critical for understanding what may await the waste industry.
Jeff Korzenik, economist at Fifth Third, gave his thoughts on future trends in a Corporate Growth Conference session tilted “Economic Outlook: 2021 and Beyond.”
As part of his forecast, Korzenik said that the business mix in the U.S. will change based on how various industries have been affected.
“We see the post-pandemic economy being [highlighted by] not so much new trends, but by trends that have become supercharged by the disruptions of the pandemic,” he said. “And those disruptions are in policy, industry, geographies, even employer/employee relationships, and then we think there is another trend that is going to accelerate in the wake of the pandemic, and that’s the opportunity to bring more manufacturing jobs back to the United States.”
Although the business landscape may shift to accommodate new trends, Korzenik said he is optimistic that there won’t be a pandemic-fueled hangover that will cast a shadow over the economy as we move through the coming year.
“I think it’s critical to understand that the recession that we’ve been through [due to COVID]—and we’re probably out of it—is unlike most recessions we’ve had in our lifetimes. … Unlike in 2008-09, we’ve gone into this [recession] with no economic imbalances,” he said. “Historically, you go into recessions when there are imbalances. In the case of 2008-09, we had too much housing inventory. We had too much leverage in the financial system. It takes a long time to wring those excesses out and to repair the damage. This time around, we had a healthcare-inspired shutdown of the economy, but we didn’t have those imbalances, and that bodes well for the opportunity to rebound quickly.”
The recent upturn in COVID cases, a new presidential administration and the promise of new vaccines are just a few of the variables that will be sure to play an outsized role in determining how the waste industry fares as we trend into a new year. As we punctuate what happened in waste in 2020, the prevailing sentiment from many seems to be that the waste industry isn’t where it was, yet, but it could have been a whole lot worse.