Corporate Growth Conference 2021: The state of the US economy and how it affects waste

Corporate Growth Conference 2021: The state of the US economy and how it affects waste

At Waste Today’s Corporate Growth Conference, analyst Michael E. Hoffman provided insight into how macroeconomic factors have impacted the waste industry.

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November 17, 2021

From disruptions brought about by COVID-19 to new leadership in Washington, the U.S. economy has seen significant changes over the last year and a half. While many industries have learned to adjust to what has been coined the “new normal,” challenges such as supply chain disruptions and inflation have created unprecedented setbacks for day-to-day operations.

At Waste Today’s Corporate Growth Conference, which was Nov. 4 in Chicago, industry analyst Michael E. Hoffman provided a view of how these macroeconomic factors have translated into specific impacts on the waste and environmental services sectors.

Economic forecast

U.S. inflation rates recently hit a three-decade high, with the consumer price index (CPI) increasing 6.2 percent in October from a year ago. While these pricing spikes are expected to continue alongside rising demand for core goods, Hoffman expressed a positive outlook on the solid waste industry’s ability to overcome cost increases.

“So, the state of garbage is [actually] really good right now. Is there inflation in the marketplace? Absolutely. Can the industry price through inflation? Absolutely,” Hoffman said. “I think garbage can price through inflation. It’s about conviction as an operator, not [whether] you can do it or not. In fact, [we’ve] seen through the third-quarter earnings season that was happening, mostly. And even where it doesn’t look like it was happening as effectively, it was clearly happening. [Companies] just needed to pick up the pace.”

Given the solid waste industry’s affinity for inflation, which Hoffman said supports better core and reported price, fiscal year 2022 (FY22) sales are expected to benefit more from inflation than costs increases. In addition, consensus headline CPI is now anticipated to average 4.4 percent growth in FY21 versus an original expectation of 2 percent.

Volume trends

In terms of volumes, Hoffman said the industry has consistently reported better numbers than expected throughout the third quarter.

The original FY21 guidance forecast has volume in a range of 0.5 percent to 2.5 percent. However, it was reported that in the first half of 2021 (1H21), volumes trended 135 basis points (bp) better than the February fiscal year outlook average volume growth of 1.4 percent.

While the 2H21 pace is expected to ease, Hoffman believes it will still run at above a long-term industry growth rate of 1 percent.

“Doing year-over-year comparisons is a little bit meaningless because of the weirdness of last year, but you see the patterns,” he said. “Negative in Q1, really high in Q2, and then everyone was thinking we were going to settle into some normalcy somewhere between [Q1] and [Q2], and we ended up better than that. Why? Because all of us have found opportunities to get in the car, get out and go somewhere, and pretty much every time we do that, we create a trash event.”

These volume trends have been supported by new business formation and an above-average merger and acquisition (M&A) cycle, Hoffman noted.

“There’s clear evidence of new business formation, and with that new business formation there’s also existing commercial business that’s starting to see positive service intervals. So, the two of those are measured as volume when you look at it from the reporting standpoint,” Hoffman said.

As for M&A, Hoffman said this cycle is the strongest he’s seen. “If everyone gets everything closed they think they can, I think we’ll spend $3 billion [by the] public companies this year. The high of 2019 was $2.7 billion. So, we could see a 10 percent increase in that and that was on the peak of four years in a row of above-average trends following the 2017 tax change that helped accelerate.”

Weakened link

A major talking point of Hoffman’s Economic Update session was how supply chain disruptions have taken a toll on solid waste operations.

When addressing the current shortage of microcontrollers, Hoffman said capacity to meet demand requirements is not projected to catch up until 2H22, and it will not be until 2H23 before backlog of demand is worked back to “normal.”

He said, “How did we get here? Two things happened. We all went to work from home, so there was this massive buying of computers as a sort of incremental volume pressure on the need for chips. And then two, events happened. As the economy started to recover and auto production started to come back, and there’s still this demand and this new source of demand at a higher level, that put pressure on the microcontroller.

“[We also] had a fire in Japan that took out 5 percent of the world’s capacity in making these and then in February you had the Texas storms that disrupted the chipmaking in that marketplace for about three weeks," he added.

Given the circumstances, Hoffman encouraged those on the equipment side of waste hauling operations to be cognizant of current wait times.

“Next year is sold out—a year ... to get a truck. You should be thinking about your ordering for 2023 now or you’re not going to get trucks or whatever else you’re ordering that has microcontrollers,” he said.