Since most of my articles deal with single company issues, I often have trouble explaining my industry outlook without turning an acquisition description into a theory of the waste universe. Yet, long-term outlooks are incredibly important. It is a widely known fact that most intrinsic value is placed in the “long-term” portion of any normal DCF.
I hold the belief that the best style of investing is long-term investing, and for that reason, it seemed incongruous to not outline how I perceive each of the players’ long-term positioning in relation to certain key issues.
The first topic will be technological innovation. Technology is most certainly a key issue in waste management, and this article is an overview for the curious investor, detailing which technological changes I believe to be paramount and their first-order effects.
The four innovations
There are four primary technological evolutions that are going to change industry dynamics in the waste management industry, each with their respective time frames regarding implementation. There are, of course, many other technologies (from food dehydrators to gasification processes), but these are the primary innovations that will change the competitive landscape.
The first innovation is improving route density through dynamic routes. Dynamic routing has the purpose of using software to optimize waste collections routes for density and fuel costs, which results in cost savings on both fuel and truck depreciation.
Dynamic routing is a fairly routine subject on earnings calls. For now, the larger players will be the leaders in software. For those unfamiliar with the waste space, the largest players are Waste Management and Republic Services.
Republic Services CEO Donald Slager recently commented on dynamic routing. From the company’s Q2-17 conference call:
“So we’re, I think, in the early innings of both. Certainly, we use computer software to route our trucks today. There’s better software out there. We’re looking at expanding our digital capability in the cab […] so we can build some more productivity in the system with digital, what we call digital operations.”
The companies are not entirely in agreement on how far along the industry is in terms of development, although both WM and RSG have adopted the technology. Here is a recent quote from Waste Management’s earnings call:
“[…] We’ve talked about routing and logistics a lot over the last couple of years with our SDO initiative, but most of the improvement that we’ve made has been on the front end of the day and the back end of the day for the drivers. So the front end of the day being their pre-trip and the back end of the day being their post-trip. We really believe we have established almost complete unanimity there within our systems, that being our districts. But within the middle of the day, which is the route itself, only about 30% of our routes are truly dynamically routed. And so we feel like we’ve got some real opportunity left within our routing and logistics to pick up some incremental dollars. As you recall a couple of years ago, we valued that at about a $100 million improvement. […]We think there still is opportunity. I would tell you, we’re kind of at – in the ninth inning or at the end of the game with respect to […] the pre-trip and post-trip. We’re still in the fifth inning or the fourth inning with respect to pulling the most efficiencies out of the route itself.”
– Q2-17 CC, Waste Management – Jim Fish, CEO
To read the full story, visit https://seekingalpha.com/article/4140274-waste-mega-trends-will-technology-transform-waste-sector.