Seeing big business opportunities, the two largest garbage and recycling companies in North America will put tens of millions of dollars into expanding their downstream plastics processing capabilities in coming years.
Waste Management (WM) and Republic Services leaders discussed the reasons for their moves toward vertical integration in plastics during the Plastics Recycling Conference, held earlier this month near Washington, D.C., as well as during conference calls with investors.
Last fall, WM bought a majority stake in polyethylene film recycling operation Natura PCR. Post-acquisition, WM is looking to boost film scrap supply, Brent Bell, vice president of recycling for WM, said during a session at the Plastics Recycling Conference.
“We are all hands on deck to unlock and get as much film as we can in the marketplace,” he said. “That’s been our big strategy.”
Meanwhile, Republic Services will open a second Polymer Center in the Midwest, after seeing strong initial demand for the recycled plastic that will be produced by its first Polymer Center, in Las Vegas.
“We’ve had multiple parties say they want all of it, so that’s kind of where we find ourselves today,” Pete Keller, vice president of recycling and sustainability at Republic Services, said during the conference.
$125 million in Natura PCR capital spending planned
WM, the largest waste and recyclables company on the continent, bought a controlling interest in Avangard Innovative’s U.S. plastics recycling business last year. Following the acquisition, Houston-headquartered WM named its newly acquired film recycling business Natura PCR, which was the brand name of Avangard’s post-consumer polyethylene resin.
Headquartered in Waller, Texas, which is near Houston, the Natura PCR operation specializes in recycling post-commercial film into clear LDPE and LLDPE post-consumer resin (PCR) that can be used in demanding applications, such as new film.
In a financial filing disclosed on Feb. 7, WM didn’t specify exactly how much it paid to buy a controlling stake in the business, but it hinted that it was a significant portion of what WM spent on acquisitions last year. WM said its 2022 acquisitions of 13 businesses totaled $507 million (net of cash acquired), including both $372 million in cash and $135 million worth of non-cash consideration (such as converting $67 million of debt owed to WM into equity in the acquired businesses). The $372 million in cash spent was “primarily attributable” to the Avangard purchase, the filing notes.
During the “Enhancing the Value Chain” session on March 6 at the Plastics Recycling Conference, Bell of WM and Jon Stephens, CEO of Natura PCR, talked about the benefits of the acquisition to both companies.
Stephens said ownership by WM helps solve the two largest problems consistently faced by entrepreneurs in the plastics recycling space.
“The two hardest things are capital and supply, and with this partnership with WM, they’re addressing that,” Stephens said. “That is huge for us and our business.”
The arrangement allows Natura PCR to focus on execution at the plant level, increasing production capacity and improving quality, Stephens said.
After the acquisition, WM is now looking to grow the business. In a Jan. 31 press release, WM noted that “the Company expects to invest about $125 million of capital expenditures to develop infrastructure to grow its plastic film recycling business.”
During a Feb. 1 call with investors, Devina Rankin, chief financial officer for WM, said the spending will go toward expanding Natura PCR’s capabilities in Waller, Texas, as well as building a recycling plant in the Midwest. More details on the spending would be divulged during a virtual presentation to investors on April 5, 2023, she said.
In the fall, local media outlets reported that a $100 million, 500,000-square-foot Natura PCR plant is currently planned for 176 acres in Mount Vernon, Ind.
Natura PCR currently has a production capacity of about 100 million pounds per year, according to its website. WM previously announced it wants to quadruple PCR production in five years.
“We’re going to be investing in to build out 400 million pounds of annual capacity,” Stephens said during the conference session.
During WM’s call with investors, Rankin talked about the demand WM sees for PCR from film. She was asked by a market researcher at Citibank what makes film recycling such an enticing market for WM in the longer term.
“Film has very low recycling rates today,” she responded. “And on top of that, if you look at … all of the brands out there, CPG companies have very strong commitments to use more recycled content products. So it’s a market where there is a very strong need and we have a strong fit.”
While significant, the $125 million WM plans to spend on film recovery pales in comparison to the sum it’s looking to invest upgrading its U.S. MRFs. The company is now looking to spend $1 billion over four years, improving profitability in its recycling business by reducing staffing headcounts, boosting recyclables volumes captured and increasing bale quality.
WM already handles a lot of post-commercial film through its commodities brokerage business. But Bell noted during the conference session that curbside film is also part of the Natura PCR business strategy. WM’s nationwide MRF upgrades include both existing and emerging technologies for sorting film, and the projects entail a reduction in the use of disc screens that tend to get film tangled in them and force facility shutdowns.
WM launched a curbside residential film recycling pilot project in the Chicago area in the fall. After the pilot, WM and Dow, its partner in the project, envision taking the curbside film acceptance to other cities nationwide.
Republic eyes Midwest for its next Polymer Center
Republic Services, the second-largest garbage and recycling company, has begun work on its second polymer center, this one a Midwest facility.
Phoenix-based Republic is already working to build a polymer center in Las Vegas. The facility will take bales produced by Republic’s MRFs and provide a more intense level of sorting than the MRFs are able to do. Then, the facility will grind and wash PET, steps that are currently undertaken by Republic’s downstream bale buyers.
During the “Secondary Sortation 2.0” session on March 7 at the Plastics Recycling Conference, Keller said the Las Vegas Polymer Center will have 17 near-infrared optical scanners and two medium-infrared scanners to help sort polyolefins (initially polyethylene and polypropylene) by food grade and color grade, producing specific bales desired by different customers. For PET, the plant will include a wash line and flake sorters, allowing it to produce hot-washed clear PET flakes for sale into a variety of markets, including food packaging.
“We’re looking to take the PET all the way to a hot-washed flake, and then looking to high grade olefins into multiple grades, both food grade and color grade, that don’t necessarily exist in the marketplace today,” he said.
Company leaders have cited public policy changes and strong brand owner demand for recycled-content packaging as driving forces behind the polymer center concept.
Keller pointed to legislation and regulations, including extended producer responsibility (EPR) and minimum-recycled-content standards, as one motivating factor. He cited California’s recycled-content mandate for PET bottles as one reason that Republic first looked to install a Polymer Center in the West.
“That was certainly a motivating factor,” he said. “We also consider the brands … . Almost every major brand has some form of voluntary goal relative to their packaging. We believe over time that they’ll begin to walk the walk. There’s a huge gap today in what those brand commitments are and what the supply in the marketplace is.”
During a Feb. 15 conference call with investors, Republic’s CEO, Jon Vander Ark, cited strong interest in offtake agreements that Republic is already seeing. “We’ve seen so much demand for the offtake of our first one that gives us a lot of confidence that the market is really getting value and needs that product,” Vander Ark said during the call.
Keller said that before the Las Vegas Polymer Center comes on-line in late 2023, Republic officials will finalize the marketing of the facility’s products. So far, no offtake contracts have been signed, he said. Republic is also exploring whether portions of the output could move downstream via strategic partnerships with Republic, rather than via offtake agreements.
In addition to regional demand for recycled plastic, Las Vegas made sense as the location of the first Polymer Center for other reasons, including nearby California’s policies driving PCR demand and the fact that West Coast states have mature recycling programs and large population centers, Keller said.
Initially, the Las Vegas facility will take material from West Coast states, as well as from Texas. As other Polymer Centers open in the Midwest, Northeast and Gulf States, however, Republic will look to optimize the freight lanes, Keller said.
Republic is already working on the Midwest Polymer Center, which is expected to open in late 2024.
“We’ve got a critical mass of material that comes out of our recycling centers in that part of the world,” Keller said.
Republic Services didn’t disclose exactly how much of Republic’s capital project spending has gone to the polymer centers. But Republic paid $294 million total for property and equipment during the fourth quarter, a sum that included some amount of spending on the Midwest polymer center.
Republic plans to build “at least four centers across the U.S.,” Vander Ark said. On stage, Keller noted that the Polymer Centers will allow MRFs to perform a less intense level of sorting, perhaps sorting curbside plastics into two grades, rather than three or four. And then the Polymer Centers will aggregate material and perform additional sorts.
The strategy will allow the company to “deploy capital in a much more efficient way.” It could also allow Republic to install sorting infrastructure in lower-population areas that now lack it.
“We’re excited about the prospect of a Polymer Center enabling simpler investment in small communities to get more material out of those communities,” Keller said.
In terms of financial returns, Republic anticipates that the Polymer Centers will bring in about $250 million in revenue each year. Republic’s leaders predict the earnings before interest, taxes, depreciation and amortization (EBITDA) margins will be over 30%.
For comparison, Republic’s overall EBITDA margin (including its much larger garbage collection and disposal business) was about 27% in 2022, according to a press release.
During the February investors call, Vander Ark described the expected internal rates of return as “very attractive.” In fact, he believes the financial results will exceed those previously forecast by Republic in a pro forma document.
“We know from the conversations we’ve had and the pricing that we’re getting right now – we’re starting to take orders, obviously, for the center in Las Vegas – I’m very confident we’re going to beat those numbers in the pro forma,” Vander Ark said.
“That gave us the confidence to accelerate that investment moving forward,” he added.
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